Holiday pay and commission – how does it stack up?

Many factors can impact the necessary calculations, which can be pretty complicated when it comes to holiday pay. The customary judgment surrounding holiday pay and commission is that all components of ‘standard remuneration’ should be considered.

What does the latest ruling on holiday pay and commission mean for your business?

The Employment Appeal Tribunal (in British Gas Trading v Lock) has said that results-based commission must be taken into account when calculating workers’ holiday pay. This comes on top of various other holiday pay cases which have been heard in courts and tribunals over the past few years.

Although the EAT decision means that commission should be included when calculating holiday pay, this is not necessarily the end of the story and there is no definitive answer to some of the questions our clients have been asking. For example, there is still uncertainty as to how we should actually calculate it.

In fact, the case will now be referred back to the employment tribunal to determine what annual leave payments Mr Lock is entitled to under UK law. The UK government will then have to decide how the ruling on holiday pay and commission is put into domestic law. The tribunal will also consider the relevant reference period for calculating the commission and whether this should be the previous 12 weeks, the previous 12 months or some other period.

Victoria Albon and Kate Coppack, writing in People Management, discusses

“Where a worker receives commission relating to performance of their duties, this should be included in the calculation of holiday pay for the 20 days given under the WTD. If this did not happen, the worker would be at a financial disadvantage when taking statutory holiday as no commission is generated during their holiday period.”

Our blog on Holiday Pay and Overtime also highlights some of the important points to consider.

What does it mean for businesses when it comes to holiday pay and commission?

All elements of pay are likely to be included in the holiday pay pot – commission, bonuses and overtime
Resulting in an increased salaries and wages bill
This may impact how your business is organised and administered, in relation to performance, sales, reward, etc.
It may result in disputes between you and your staff on what they should be paid while on holiday
There may be less incentive for bonus and commission payment schemes

What can you be doing now?

Consider what the financial impact will be
Review your overall pay and reward strategy and how this aligns with your business
Review your holiday policies
Consult and involve staff in helping to design future employee incentive schemes
Ensure staff are not deterred from taking leave
Ensure that people who are paid wholly or partly by commission (or any other variable payment linked to their normal work) have that entitlement reflected in their holiday pay – at least in respect of the 4 weeks leave entitlement provided for under the Working Time Directive
Assess your potential liability for back-dated claims and compensation

We appreciate this latest judgement only adds to the current uncertainty, yet we can take an educated guess as to what the final decisions will be.

In the meantime, we recommend that you take professional advice before making any changes to the way you calculate holiday pay and in responding to any claims for underpaid holiday pay.