It’s vital to keep on top of legal developments that could affect our businesses, and a case heard in the Supreme Court last week should act as a wake-up call for many small firms.

The court ruled that thousands of police staff in Northern Ireland could reclaim up to 35 years’ worth of miscalculated holiday pay, landing forces with a potential bill of more than £40m.

This means that employees can now bring historical claims for underpayment, limited to two years in England but in Northern Ireland potentially reaching back to 1998.

Clearly, this has ramifications for employers, particularly owners of small businesses that could face difficulties from the potential burden of costly admin and claims.

So what did the judgement say?

The Supreme Court upheld a decision made at the Northern Ireland Court of Appeal in 2019, that police workers should have had holiday pay calculated according to their ‘normal’ pay – including regular payments for overtime, bonuses and commission – rather than their basic pay.

The Court also determined that a three-month gap or a lawful payment will no longer break the series of deductions. This ruling removes the limit on potential payment periods if a common reason for underpayments can be established.

What are the implications for employers?

Although the legislation about holiday pay calculation has been in place for some time, the conditions this case addresses are specific and widespread, and it is significant that it has taken litigation to reach this stage.

Employers most likely to be affected are those who run small businesses which operate commission schemes, overtime payments or perhaps bonus schemes. 

However, most SME owners should not panic. Tribunals are settled on a case by case basis and just because this ruling has gone one way, it doesn’t mean the law is settled for everyone.

Of course legal theory is one thing. Practice is another.

In my opinion, the trade-off between reclaiming historic pay entitlement and damaging workplace culture will prevent many employees from litigating, thanks to the strong relationships many staff have with their employers in the small business community.

When there is mutual respect, anything can be agreed, so I would advise both employers and employees to be considerate of each other’s position. 

However, where statutory rights are infringed the situation becomes more complex, as negotiations can only go so far.

There are also questions in the case about how claims were brought to the employer in the first place, for example regarding how historical employment claims for staff were dealt with before reaching litigation. There may also be considerations for people who have left the business but whose claim window of three months remains open.

How to calculate holiday pay

Calculating holiday entitlement which includes commission that varies from month to month can be challenging, but it’s essential to ensure that employees receive their fair entitlement. To handle this situation, you can use an average commission calculation method.

It’s important to keep accurate records of commission payments and communicate the holiday pay calculation method clearly to employees to maintain transparency and compliance with employment laws. Additionally, consider seeking professional advice to ensure your holiday pay calculations align with current regulations.

There are several steps to take in order to calculate holiday entitlement that includes variable monthly commission.

A reference period should be established, ideally 12 months or more. Collect your employee’s commission payments and calculate the total and average per month, following which the daily rate can be established.

Holiday pay including commission therefore equals basic pay plus daily commission rate for each day of the holiday period.

The same principles apply for bonuses, assuming they are paid with sufficient regularity.

Advice on how employers can move forward

Your employees may not be aware of this case and the legislation, or even be interested in pursuing a claim.

It is still worth knowing your company’s position to prepare for every eventuality. So, review your risks, and do some sums based on the past two years (assuming you’re in England). Then consider which of your employees have the longest length of service and highest commission and bonus rates and who are, therefore, the most likely to have a significant claim.

If you are liable, there are creative solutions to resolving gaps or compensation as long as they are fair and equitable for the employee. I suggest seeking advice on how this can be managed, as working with your finance and HR departments can help you manage the outlay without breaking the bank.

One pragmatic option could be to reduce other employment benefits – at least in the short term – if your budget for historical and future pay burdens is an issue. However you tackle the problem, consider this to be a line in the sand so you are on sure ground for the future.

Natasha Kearslake is director at Organic P&O Solutions, based in Reading

Further reading on holiday pay

What are the new rules on calculating holiday pay for seasonal workers? – The Harpur Trust v Brazel case has challenged the way that seasonal and part-year worker holiday pay is calculated. What should you do now?

Holiday pay for laid-off workers – If a member of staff has been made redundant, are they still entitled to their holiday pay?

Zero hours contracts holiday entitlement and holiday pay – How do you calculate holiday entitlement and pay of someone on a zero hours contract? We clear up the confusion and help you get it right