Getting your holiday pay sums right
Summer holidays are around the corner. The law says that when someone is on annual leave, they must be paid their normal pay. The question is, what is “normal” holiday pay?
For someone who is paid a basic salary only, it’s easy. Just pay them as you would usually. However, if someone’s pay packet includes regular extras, you may need to pay more than you realise.
If your employees regularly earn commission, overtime or other payments while they are working, be careful. Such payments can be considered as “normal pay”.
Let’s say your employee, Sam, is contracted to work eight hours a day. In reality, he works an hour’s paid overtime most days. When he is on holiday, he can’t work that overtime. That means he will receive less pay than usual. Similarly, if his daily work involves selling products for which he gets commission, he won’t be able to earn commission while he is off. His holiday pay would not be the same as his “normal pay”.
How to calculate holiday pay
Let’s say Sam earns a basic salary plus commission. In the last year, he has earned £3,000 in commission. He has two weeks’ holiday. How do you calculate his holiday pay?
If his commission is earned by selling goods most days, it will count as “normal pay”. You must therefore include it in his holiday pay. To do this, calculate his average daily commission in the 12 working weeks before he took holiday. As of April 2020, you will need to take the average over the previous year.
Alternatively, if Sam earned £1,800 commission in January and £1,200 in September, his commission earnings are irregular. They would not be considered part of his “normal pay”. He would simply be paid his salary.
A few final points
Just to complicate things further, this only applies to 20 days of the minimum 28 days per annum annual leave. This is due to the UK having a more generous minimum holiday entitlement than the EU law demands.
If you fail to pay any additional regular earnings as holiday pay, the costs could be significant. Potentially, the claim could be backdated by up to two years.
This is a confusing topic. If you would like to discuss any individual concerns, please contact me.