How to calculate holiday pay for overtime and commission payments

"What are the rules around holiday pay?" is a common question often asked by employers

Published on

January 31, 2020

Male employee working overtime during his holidays for extra pay
Male employee working overtime during his holidays for extra pay

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"What are the rules around holiday pay?" is a common question often asked by employers. It can be confusing, as regulatory changes mean that employers now need to consider additional elements when working out an employee's holiday pay. 

Simply put, employers now need to include regular commission and regular overtime payments when calculating an employee's or worker's holiday pay. This is explained in further detail below:

How should holiday pay be calculated?

Holiday pay is calculated based on a week's pay.  The calculation will vary, depending on the kind of hours an employee works and how they are paid for the hours. 

  • Normal working hours (full- or part-time): For employees with normal working hours (i.e. they work fixed hours at a fixed pay), their holiday pay should be the same rate as their normal pay. For example, an employee who earns £300 a week will be paid £300 when he or she takes a week off.  
  • Shift work / no normal working hours (full- or part-time): This applies to employees doing shift work with fixed hours, as well as those without fixed hours. Their holiday pay will be calculated using the average pay they've earned over the previous 12 working weeks. However, this is set to change in the near future. Starting 6th April 2020, the employee's holiday pay will be calculated based on the average they've earned over 52 weeks. If the worker is employed for less than 52 weeks, the holiday pay reference period should then include as many whole weeks of pay as is available. 

When should overtime be included?

  • Regular voluntary overtime: This refers to overtime work that an employee isn't required to perform, but can accept. According to the Employment Appeal Tribunal (EAT), employers need to include regular voluntary overtime payments when calculating the holiday pay of their employees. This applies only to the first four weeks of holiday pay (these four weeks of annual leave are a requirement set by the EU Working Time Directive). Under the UK law, workers are granted an additional 1.6 weeks' holiday, and this period doesn't have to include voluntary overtime.  
  • Normal non-guaranteed overtime: This refers to overtime work that an employer isn't obliged to offer, but employees are contractually obliged to work when it is offered. Employers are required to include normal non-guaranteed overtime payments for the first four weeks' holiday pay. 

When should commission be included?

If your employee's pay usually includes contractual, results-based commission, this must be provided in at least four weeks' of his or her paid holiday.

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