The summer holiday season may be over but the uncertainty surrounding holiday pay costs continues to plague the hospitality sector as legal and HR professionals await a definitive ruling from a UK tribunal as to how holiday pay for workers who earn overtime pay, bonus or commission should be calculated and processed.

Under UK law, workers are entitled to 5.6 weeks of annual leave and must be paid their normal salary when taking such leave. Where their salary fluctuates due to contractual overtime pay, commission or bonus, for example, a week’s pay is normally calculated by working out an average of their last 12 weeks’ pay before the holiday period starts.

Lock v British Gas Trading Ltd ruling

In the recent case of Lock v British Gas Trading Ltd, the European Court held that remuneration which is linked intrinsically to the performance of tasks must be included in holiday pay calculations. Therefore, if an employee earns commission, the calculation of the holiday pay must include the commission already earned by the worker before the holiday period as well as commission that might be earned by the worker during the holiday period itself. This is to ensure that workers are not deterred from exercising the right to annual leave due to financial disincentive.

The case has been sent back to the UK tribunal to decide how these calculations should be made by employers in practice so it is currently unclear if a 12 week, a 12 month reference period or any other fair period will be applied by the UK tribunals. In addition to this, there are also other UK cases which confirm that non-contractual overtime must also be taken into account when calculating holiday pay.

If you are offering your operational staff overtime, you should now consider whether your practice of offering OTE should continue or if it is more sensible to move towards a Time Off in Lieu (TOIL) system. This change, however, does not eliminate any unlawful deduction of wages claim (for holiday pay) potentially going back the last 16 years.

Review scheme rules for commission and bonuses

As for sales and marketing teams who earn commission or bonus based on the number of hotel rooms, conferences and banquettes sold or membership subscription for leisure clubs, this may be a good time to review your scheme rules, particularly in relation to how commission would accrue and is paid out (e.g. weekly, monthly, quarterly, bi-annually or yearly). The timing of the payment will determine if it is caught in the reference period that will need to be used to calculate a week's pay.

It would also be advisable to stipulate a formula to calculate notional commission during the time when a worker is taking annual leave. Depending on sales cycles and occupancy trends, it may be appropriate to look at historical sales revenue and commission as a yardstick.

As variable pay linked to performance such as discretionary bonuses, shift premiums, standby and emergency call-out payments is likely to be caught, a risk analysis should be carried out to assess your overall financial exposure.

If you outsource your payroll, accurate information will need to be given to your supplier to ensure the correct holiday pay is processed.