A landmark employment tribunal ruling has placed extra pressure on organisations to maintain accurate holiday pay calculations.
From now on, employee holiday pay must take into account both their basic salary, plus any results-based commission and overtime they would have earned.
The case between Mr Lock and British Gas was brought before an employment tribunal after the sales consultant’s holiday pay was based solely on his basic salary.
It centred on the fact that workers whose wage is regularly topped up by a incentivised commission scheme are unable to generate any commission whilst on holiday so are likely to suffer financially as a result which may deter them from taking annual leave.
How to calculate commission holiday pay under the new rulings?
Guidance on how employers should implement the ruling when calculating commission holiday pay, or whether cases can be backdated, has yet to be confirmed.
Under the Working Time Directive workers are entitled to holiday pay at the rate of a ‘normal’ week’s pay for four weeks’ annual leave. This means anything intrinsically connected to the work carried out by the employee under the terms of employment. Employers are not legally required to pay holiday pay for the additional 1.6 weeks’ holiday provided by UK law.
What is the reference period for calculations?
In the case of Mr Lock, the court ruled that his average commission earnings over a 12 week period must be taken into account as it made up the majority (60%) of his income.
Nick Whiteley, Managing Director at Vanquish Integrated People Solutions, believes the ruling is expected to have severe financial and administrative consequences for employers operating commission schemes.
He says: “Monitoring staff holiday requests and calculating the payroll for worker commission schemes has all of a sudden become a lot more complex for HR and Payroll teams.
“It is yet to be confirmed how payable commission holiday pay should be calculated, but whatever ‘reference period’ they are advised to adopt, be it 12 weeks or otherwise, it is imperative for employers to record the working time and commission earned by staff so any commission can be calculated and factored in the holiday pay.
“Failing to do so could leave employers at risk of overpayments or open to penalties for incorrect commission holiday pay.”
Can workforce management systems make a difference?
Cloud-based Workforce Management systems will be crucial to unravelling the complexity of commission holiday pay calculations and ensuring employers comply with the new rulings.
Today’s systems can be customised to specific company rules, and feature dedicated functions as well as self-service portals to simplify and streamline the management of holiday bookings.
Self-Service portals empower employees to request their leave direct to line managers, who can then accept or decline requests at the touch of a button.
Greater transparency of staff holidays means managers can plan the workload in advance around staff availability in order to maintain appropriate staffing levels.
Alerts can also be configured to highlight to managers which employees qualify for commission-based holiday pay so these members of staff can be closely monitored.
Meanwhile, with total visibility of staff attendance and historical payroll data managers can quickly calculate what commission and overtime employees have earned over a specified ‘reference period’, so any additional pay can automatically be applied to the payroll run.
Seamless integration with payroll and accounting systems means the entire payroll process can be automated; saving time spent reconciling manual timesheets and reducing errors.
Should we wait for the outcome of an appeal?
Nick Whiteley adds: “Although the decision will more than likely be appealed at the Supreme Court, adding to the confusion for employers, the ruling has once again highlighted the need for employers to evaluate how they manage staff time in order to comply with employment regulations so they can mitigate their compliance risk.
“Organisations will find it doubly difficult to make accurate calculations if their processes are out of date.”