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.

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:

Holiday pay reference period

Under the UK Working Time Regulations 1998, almost all workers are entitled a minimum of 5.6 weeks of holiday leave per annum (which can include public holidays). 

Workers who are entitled to this include: 

• Employees and workers with regular and irregular hours
• Employees and workers on zero-hours contracts
• Agency workers
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April 2020 changes to calculating holiday pay:

Prior to April 2020, staff with working hours that vary have their leave calculated based on a reference period of 12 weeks. With effect from 6th April 2020, the holiday pay for workers with variable hours will be calculated based on the average they've earned over 52 weeks. 

The period refers to the last 52 weeks in which the staff has worked and received pay. Weeks whereby the worker hasn’t received pay won’t be counted towards the 52-week reference period. 

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. For example, if a worker has been employed for 30 full weeks, his or her holiday pay should be calculated based on the average pay received during those weeks.

Regular voluntary overtime: 

Regular voluntary overtime 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: 

Normal non-guaranteed overtime 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.

Other components holiday pay should include:

• Bonus payments: If an employee is regularly paid bonuses, these payments must be included in at least four weeks of their paid holiday. 
• Commission payments: If an employee's pay usually includes contractual, results-based commission, this must be provided in at least four weeks' of his or her paid holiday.
• Travelling time allowances

Note: While some employers may decide to include overtime, commission and bonus payments in a worker’s full 5.6 weeks’ paid holiday, this isn’t mandatory as the law on these payments is based on the EU Working Time Directive, which indicates the right to a minimum of four weeks of paid holiday a year.

Can employees be paid for untaken holidays?

Employees aren’t entitled to being paid for statutory holidays they haven’t taken during the year. 

When should employees be paid for holidays?

Unpaid statutory holiday

A worker can be paid in place of taking statutory leave - otherwise known as ‘payment in lieu’ - when they leave the job. This applies across different scenarios of termination of an employment contract, including when the employee resigns, is made redundant or dismissed for misconduct.

If there is a significant amount of untaken statutory holiday, you may limit the amount you pay out by asking the employee to take holiday during their notice period. You may also stipulate that your employees’ remaining annual holiday is to be taken during their notice period.

If an employee doesn’t receive their unpaid holiday pay by the end of their employment, they may seek to resolve the issue through the Acas conciliation service or make a claim through an employment tribunal. 

Untaken contractual holiday

If you offer contractual holiday - which is anything more than the statutory entitlement of 5.6 weeks - you may stipulate different rules regarding the pay in lieu for these holidays.

Most employers apply the ‘use it or lose it’ policy for these holidays, but a worker may also be entitled to receive payment in lieu or carry over untaken holidays to the next leave year.  

Additional resources

Use Gov.uk’s Holiday Calculator to calculate an employee’s holiday entitlement (fixed hours, irregular hours or a zero-hours contract)