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Unpicking the rules on holiday pay

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Ever since the European Courts of Justice ruling of May 2014 there has been a fair degree of confusion over what does need to be and what can be excluded when calculating holiday pay.

Traditionally nearly all UK employers based holiday pay on the amount of wages an employee normally received – i.e their basic salary or hourly rate.  If an employee worked casual hours holiday pay was based on an average of hours worked.

However, all that changed on a sunny spring day in May when the ECJ said hang on a mo, holiday pay needs to include overtime and other regular payments as well.

Ever since that time there have been more questions than answers about what should or should not be included in holiday pay, and with each tribunal ruling the picture becomes clearer.

Commission Payments

In February of this year the ECJ confirmed that commission payments that make up normal pay should be included when calculating holiday pay.  So if you have a formal commission scheme, and employees work towards it each month as part of their normal remuneration then this needs to be factored in to holiday pay.  See Lock vs British Gas

Overtime Payments

In the case of Bear Scotland vs Fulton the Employment Appeal Tribunal found that overtime which is non-guaranteed should be included in holiday pay calculations where the employee is under an obligation to do it.  Where overtime is purely voluntary then an employer may not have to include overtime in the holiday pay calculation.

So to unpick this one, the simple case is what does your contract say – so if the employees contract has a nice heading called overtime which describes how much they get paid for working extra hours and has a clause that says something like:

Employees are expected to undertake a reasonable amount of overtime when requested to meet the needs of the business

Then it could be argued that whilst the overtime is not guaranteed there is a clear expectation that employees will do it when asked – so any additional hours worked under this contract should be included in calculating holiday pay.

So what should you do?

The simple answer is if the criteria above applies to you then you should start paying holiday pay with commission and overtime included as it will only be a matter of time before someone asks a question you’d rather not answer.