Holiday Pay for Commission Workers: Including Variable Earnings

Sales teams, account managers, and other commission-based employees have variable earnings. Getting their holiday pay wrong can lead to significant underpayment and tribunal claims stretching back years.

The Legal Position

EU Case Law

Following Lock v British Gas and other EU cases, UK law requires commission and other variable earnings to be included in holiday pay.

Principle: Holiday pay should reflect what the worker would have earned if they'd been working, not just basic salary.

Which Holiday?

First 4 weeks of statutory leave (20 days for full-time): Must include commission and variable earnings.

Additional 1.6 weeks (8 days): Can be paid at basic rate only, unless contract says otherwise.

Contractual leave above 5.6 weeks: Whatever the contract states.

Types of Variable Earnings

Commission

Regular commission:

• Monthly or quarterly based on sales
• Percentage of deals closed
• Tiered commission (higher rates for higher sales)

Ad-hoc commission:

• One-off bonuses for specific deals
• Sporadic payments

Bonuses

Performance-related bonuses:

• Annual bonus based on targets
• Quarterly bonuses
• Project completion bonuses

Discretionary bonuses:

• Christmas bonus given to everyone
• Goodwill payments

Other Variable Pay

• Overtime (regular or irregular)
• Shift allowances
• On-call payments
• Productivity bonuses

What Must Be Included

Intrinsically Linked Test

Include in holiday pay if:

• The payment is intrinsically linked to the performance of tasks the employee is contractually obliged to carry out
• It's paid sufficiently regularly to be considered normal remuneration

Examples: Must Include

Sales commission:

• Employee's role is to sell
• Commission is directly linked to sales performance
• Paid regularly (monthly/quarterly)

Result: Must be included.

Shift allowances:

• Contract requires shift work
• Allowance paid for working unsocial hours
• Paid every month

Result: Must be included.

Regular overtime:

• Employee regularly works overtime
• Overtime is either compulsory or worked consistently
• Predictable pattern over several months

Result: Must be included (at least for first 4 weeks of leave).

Examples: May Not Need to Include

Discretionary Christmas bonus:

• Given to all staff regardless of performance
• No contractual entitlement
• Not linked to duties performed

Result: Likely doesn't need to be included (though this is gray area).

One-off project bonus:

• Paid once for exceptional work on a specific project
• Not regular
• Not part of normal duties

Result: May not need to be included (depends on facts).

When in Doubt

Err on the side of inclusion. Underpaying holiday is riskier than paying a bit more.

The 52-Week Reference Period

How It Works

Calculate average weekly earnings over the 52 weeks before the holiday.

Formula:

(Basic pay + Commission + Other variable pay over 52 weeks) ÷ 52 = Weekly holiday pay

Step-by-Step Calculation

Step 1: Identify the 52-week period ending with the last complete pay period before the holiday.

Step 2: Add up:

• Basic salary/wages
• All commission paid
• Bonuses (if intrinsically linked)
• Overtime
• Allowances

Step 3: Divide total by 52.

Step 4: Multiply by weeks of holiday being taken.

Example: Sales Rep

Scenario:

• Basic salary: £30,000/year = £576.92/week
• Commission over last 52 weeks: £15,000
• Total over 52 weeks: £45,000
• Taking 2 weeks' holiday

Calculation:

£45,000 ÷ 52 = £865.38/week average
2 weeks × £865.38 = £1,730.76 holiday pay

Not: £576.92 × 2 = £1,153.84 (basic only).

Difference: £576.92 underpayment if commission not included.

Commission That Hasn't Been Earned Yet

The Timing Issue

Problem: Employee takes holiday in January. Commission for January sales isn't calculated until February.

How to handle:

Method 1: Use Last 52 Weeks (Exclude Current Period)

Calculate based on commission already paid in the 52 weeks before the current month.

Example: Holiday in January 2025. Use commission from January 2024 - December 2024.

Pros: Simple, uses actual figures.

Cons: Doesn't capture very recent changes in earnings.

Method 2: Estimate and True-Up

Estimate commission for the current period based on usual pattern. Adjust on next payroll if actual commission differs.

Example: Employee usually earns £2,000/month commission. Estimate this amount, then correct next month once actual commission is known.

Pros: More accurate reflection of current earnings.

Cons: More admin.

Method 3: Lag the Commission by One Month

Always calculate holiday pay using commission figures from the previous month (which are finalized).

Example: Holiday pay in January uses commission figures up to November (December's commission won't be finalized yet).

Pros: Uses finalized figures only.

Cons: Slightly out of date.

Commission Paid Quarterly or Annually

Less Frequent Payments

If commission is paid quarterly or annually, include it in the 52-week calculation when it's paid.

Example:

• £60,000 annual bonus paid in April
• Over 52 weeks including that payment: £60,000 bonus + £30,000 basic = £90,000
• Average: £90,000 ÷ 52 = £1,730.77/week

Effect: Holiday pay is much higher in the weeks following the bonus payment (smooths out over the 52-week period).

Smoothing

Some employers "smooth" large annual bonuses across the year for holiday pay purposes.

Method: Divide annual bonus by 52 weeks and add to each week's holiday pay calculation.

Example: £20,000 annual bonus = £384.62/week equivalent.

Add this to basic pay for holiday calculations throughout the year.

Legal position: This is more generous and unlikely to be challenged, though the strict 52-week method is the legal requirement.

First Year Employees

Less Than 52 Weeks' Service

If an employee hasn't been employed for 52 weeks, use however many weeks they have worked.

Example:

• Started 6 months ago (26 weeks)
• Basic pay: £15,000 over 26 weeks
• Commission: £6,500 over 26 weeks
• Total: £21,500

Calculation:

£21,500 ÷ 26 = £826.92/week average

Use this rate for holiday pay.

Very New Starters

If taking holiday in their first few weeks, estimate based on:

• Expected basic pay
• Expected commission (based on role/targets)

Adjust on a later payroll once actual commission is known.

Calculating for Part-Time Commission Workers

Pro-Rata Entitlement

Part-time workers get holiday pro-rated:

(Days worked per week ÷ 5) × 28 = Annual entitlement

Commission Included Same Way

Calculate 52-week average of all earnings (basic + commission), divide by 52, use that rate for holiday.

Example:

• Works 3 days/week
• Annual entitlement: 16.8 days
• Basic over 52 weeks: £18,000
• Commission over 52 weeks: £7,000
• Total: £25,000

Holiday pay rate:

£25,000 ÷ 52 = £480.77/week
Daily rate: £480.77 ÷ 5 = £96.15/day (based on 5-day week)
For 1 week (3 working days): £96.15 × 3 = £288.45

Zero-Commission Periods

Weeks with No Commission

If some weeks in the 52-week period had no commission (e.g., employee was new, or had a slow quarter), include those weeks in the calculation.

Don't exclude zero-commission weeks - they're part of the average.

Example:

• 52 weeks: 20 weeks with no commission, 32 weeks with commission totaling £12,000
• Basic pay: £25,000
• Total: £37,000

£37,000 ÷ 52 = £711.54/week average

Dealing with Clawbacks

Commission Clawbacks

Some contracts allow clawback of commission if a deal falls through or a customer returns goods.

Holiday pay impact:

If commission was already paid and included in 52-week calculation:

• Holiday pay reflects earnings at that time
• If clawback happens later, don't adjust past holiday pay

If commission hasn't been paid yet:

• Only include commission once it's paid and no longer subject to clawback

Practical Approach

Most employers calculate holiday pay based on commission actually received, not commission subject to potential clawback.

Record Keeping

What to Track

For each commission-based employee:

• Basic pay each week/month
• Commission paid each period
• Bonuses paid
• 52-week rolling total
• Average weekly earnings
• Holiday pay calculations

Software

Payroll systems should automatically track and calculate, but many don't handle commission correctly by default.

Check your system:

• Does it include commission in holiday pay?
• Does it use the 52-week method?
• Does it need manual adjustments?

Manual Tracking

If your system doesn't automate this, maintain a spreadsheet:

• Column for each pay element
• 52-week rolling calculation
• Holiday pay rate updated monthly

Underpayment Claims

Time Limits

Workers can claim up to 2 years of underpaid holiday pay.

For a sales team: This can add up to significant sums.

Example Claim

Scenario:

• Sales rep consistently earned £50,000/year (£30k base + £20k commission)
• Employer paid holiday at basic rate only (£30k)
• Took 4 weeks' holiday per year

Underpayment per year:

Correct rate: £50,000 ÷ 52 = £961.54/week
Paid: £30,000 ÷ 52 = £576.92/week
Underpayment: £384.62/week
× 4 weeks/year = £1,538.48/year
× 2 years = £3,076.96 + interest

Avoiding Claims

1. Calculate correctly from the start
2. Audit your holiday pay regularly
3. Include commission in calculations
4. Keep clear records
5. Backpay if you discover errors

Communicating with Employees

Explaining the Calculation

Commission-based employees may not understand why their holiday pay varies.

Provide:

• Explanation of 52-week average method
• Breakdown showing basic + commission
• Why the rate changes quarter to quarter

Payslip Clarity

Show on payslips:

• Holiday pay amount
• How many days/weeks taken
• Ideally, show the rate used

Example: "Holiday pay (2 weeks @ £865.38/week): £1,730.76"

Practical Tips

Tip 1: Use Software Correctly

Configure payroll software to:

• Track all variable pay elements
• Calculate 52-week averages automatically
• Include commission in holiday pay

Tip 2: Regular Audits

Every 6 months, audit:

• Are all variable pay elements being included?
• Is the 52-week calculation correct?
• Any systematic errors?

Tip 3: Train Managers

Ensure line managers understand:

• Holiday pay isn't just basic salary for commission workers
• Why employees might question their holiday pay
• How the calculation works

Tip 4: Clear Contracts

Employment contracts should state:

• Holiday entitlement
• That holiday pay includes commission and variable earnings
• Reference to 52-week calculation method

Example clause: "Holiday pay will be calculated using the average of your earnings (including basic pay, commission, bonuses, and other variable pay) over the 52 weeks preceding your holiday, in accordance with the Working Time Regulations 1998."

Tip 5: Keep Detailed Records

For each employee:

• Commission statements
• Bonus notifications
• Holiday booking records
• Holiday pay calculations

Retention: At least 3 years, ideally 6 years.

Common Mistakes

Mistake 1: Paying Basic Rate Only

Issue: Ignoring commission entirely.

Result: Significant underpayment, tribunal claims.

Correction: Use 52-week average including all commission.

Mistake 2: Using 12 Weeks Instead of 52

Old law (pre-2020) used 12-week average.

Current law: 52 weeks.

Correction: Update your systems and processes.

Mistake 3: Excluding "Discretionary" Bonuses That Aren't Actually Discretionary

Issue: Calling a performance bonus "discretionary" to avoid including it in holiday pay.

Result: If it's tied to performance and regularly paid, tribunals will likely find it must be included.

Correction: Include all regular performance-related pay.

Mistake 4: Not Updating as Commission Changes

Issue: Using an old calculation when commission has increased significantly.

Result: Underpaying.

Correction: Use a rolling 52-week calculation that updates regularly.

Mistake 5: Failing to Account for First 4 Weeks vs Additional Leave

Issue: Paying all holiday at basic rate, claiming additional 1.6 weeks don't need commission included.

Result: Underpaying. At least the first 4 weeks (20 days) must include commission.

Correction: Include commission for at least the first 4 weeks of statutory leave.

Enhanced Contractual Holiday

Above 5.6 Weeks

If your contract gives more than 5.6 weeks (28 days), you can potentially pay the excess at basic rate only.

Example:

• 30 days total (5.6 weeks + 2 days extra contractual)
• First 28 days: Include commission in holiday pay
• Extra 2 days: Basic rate only (if contract says so)

Clarity is key: State this in the contract to avoid disputes.

Key Takeaways

• Commission must be included in holiday pay if intrinsically linked to role
• 52-week average is the required calculation method
• Include all variable earnings: commission, bonuses, overtime, allowances
• Update regularly: Use rolling 52-week calculation
• First 4 weeks minimum: Must include commission for first 20 days of statutory leave
• Keep records: Track all earnings elements for accurate calculations
• Audit and correct: Review calculations regularly to avoid underpayment
• Tribunal risk: Underpayment claims can go back 2 years

Getting holiday pay right for commission workers protects you from expensive claims and treats employees fairly.