TimeClock 365 sees this mistake constantly during payroll audits: an employer calculates holiday pay using an employee's basic salary alone, ignoring the regular overtime or commission that actually makes up a large share of what that employee normally earns. That approach has been legally wrong in the UK for years, and getting it wrong at scale — across dozens or hundreds of employees, over multiple holiday periods — is exactly the kind of error that surfaces expensively in a tribunal claim or, since April 2026, in a Fair Work Agency inspection.

The core rule: holiday pay must reflect "normal remuneration"

Workers taking statutory annual leave under UK law are entitled to be paid their "normal remuneration" for that leave, not simply their base contractual rate. This principle comes from a series of Employment Appeal Tribunal and Court of Appeal decisions interpreting the Working Time Regulations 1998 in light of the underlying EU Working Time Directive, and it has been consistently upheld since. The reasoning is straightforward: if a worker's pay would normally fluctuate with overtime, commission, or regular allowances, then a holiday that only pays base salary effectively penalises them for taking leave — which undermines the point of paid holiday as a genuine rest period.

"Normal remuneration" applies to the first 4 weeks of statutory annual leave under Regulation 13 of the Working Time Regulations 1998 (the EU-derived entitlement). The additional 1.6 weeks under Regulation 13A, and any further contractual holiday an employer chooses to offer, can lawfully be paid at basic rate only if the employment contract says so — though many employers pay all leave the same way for simplicity and to avoid running two different calculation methods in parallel.

Overtime: the Bear Scotland and Flowers line of cases

The leading case on overtime is Bear Scotland Ltd v Fulton (2015), where the Employment Appeal Tribunal held that non-guaranteed overtime — overtime the employer isn't contractually obliged to offer, but which the worker is required to work once it's assigned — must be included in holiday pay if it's worked with sufficient regularity to count as part of normal pay.

The more significant development came in Flowers v East of England Ambulance Trust, where the Court of Appeal went further and confirmed that purely voluntary overtime — overtime the worker can turn down with no obligation at all — must also be included, provided it is worked regularly and settled enough over time to form part of the worker's normal remuneration. The test isn't whether the overtime is contractually guaranteed; it's whether, looking at the actual pattern of hours worked, it has become a normal part of what the worker earns.

In practice, this means employers need to look at an individual worker's actual overtime pattern, not the letter of their contract, to decide whether overtime should be folded into their holiday pay calculation.

Commission: the Lock v British Gas precedent

Commission-based pay raised a separate legal question, settled in Lock v British Gas Trading Ltd. Mr Lock was a sales employee whose commission depended on the sales he generated, not directly on the hours he worked. The Employment Appeal Tribunal held that where commission is intrinsically linked to the tasks a worker is required to carry out under their contract, it must be reflected in holiday pay — otherwise, a worker who takes leave suffers a real, delayed financial penalty once their commission naturally dips in the weeks following their return, because no sales were being generated while they were away.

This matters most for sales roles, recruitment consultants, and any position where a meaningful part of take-home pay is commission-based rather than fixed salary. If commission is a normal and regular feature of how someone is paid, it belongs in the holiday pay calculation for their 4 weeks of Regulation 13 leave.

How to actually calculate it: the 52-week reference period

For workers without fixed hours or fixed pay, UK law uses a 52-week reference period to calculate a week's pay for holiday purposes. In outline:

  • Look back over the 52 weeks immediately before the leave is taken (or the start of the leave year, depending on the calculation point being used).
  • Include weeks where the worker was paid, and use their total pay across that period — including regular overtime and commission that meets the "normal remuneration" test above.
  • Exclude any week where no pay was due at all, and go back further (up to 104 weeks) to find 52 weeks that do count, if needed.
  • Divide total pay across those 52 weeks by 52 to get an average week's pay, which is then used to calculate holiday pay for the leave being taken.

This replaced the older 12-week reference period, extending the look-back window specifically to smooth out seasonal and irregular fluctuations in overtime and commission — a direct response to how badly a shorter window could distort results for workers whose extra pay isn't evenly spread across the year.

Why this is now a bigger compliance risk, not a smaller one

Since 6 April 2026, employers have faced a statutory duty to keep adequate working time and holiday pay records for 6 years, with breach treated as a criminal offence under Regulation 29 of the Working Time Regulations. That change raises the stakes specifically for overtime- and commission-linked holiday pay, because this is the calculation most likely to be done incorrectly — or not documented at all. A payroll system that simply pays holiday at basic salary, with no audit trail showing how (or whether) overtime and commission were factored in, is now a visible gap in exactly the kind of record a Fair Work Agency inspection or an employment tribunal would ask to see.

Getting this right requires two things working together: a correct calculation method, and a system that can actually reconstruct, months or years later, what a worker was paid in the 52 weeks before each period of leave. Time-tracking and payroll-integration tools that log actual overtime hours and link cleanly into PTO and leave management make that reconstruction possible; a spreadsheet that gets overwritten every quarter does not. This calculation discipline sits squarely inside the broader scope of HR compliance management that UK employers are now expected to demonstrate, not just claim.

Frequently asked questions

Does UK holiday pay have to include overtime?

Yes, in many cases. Following Bear Scotland v Fulton and Flowers v East of England Ambulance Trust, both non-guaranteed and purely voluntary overtime must be included in the calculation of a week's pay for the 4 weeks of statutory annual leave under Regulation 13 of the Working Time Regulations 1998, provided the overtime is worked regularly enough to count as part of the worker's normal remuneration. Occasional, one-off overtime that doesn't form a settled pattern does not need to be included.

Does commission count towards holiday pay in the UK?

Yes. Following Lock v British Gas Trading Ltd, commission that is intrinsically linked to the work a person is contractually required to do must be factored into holiday pay for the 4 weeks of Regulation 13 statutory leave. This applies most directly to sales and similar commission-based roles where commission forms a regular, normal part of pay rather than an occasional bonus.

How do employers calculate an average week's pay for holiday purposes?

UK law uses a 52-week reference period. Employers look back over the 52 weeks in which the worker was actually paid (going back up to 104 weeks if needed to find 52 paid weeks), total the pay across those weeks — including qualifying overtime and commission — and divide by 52 to get the average week's pay used to calculate holiday pay.

Does this rule apply to all annual leave, or just part of it?

The "normal remuneration" requirement, including overtime and commission, applies specifically to the 4 weeks of leave derived from Regulation 13 of the Working Time Regulations 1998. The additional 1.6 weeks under Regulation 13A, and any extra contractual holiday above the statutory minimum, can be paid at basic rate only if the contract explicitly allows it — many employers choose not to split the calculation and pay all leave consistently to avoid administrative complexity.

What happens if an employer has been calculating holiday pay incorrectly for years?

Underpaid holiday pay can potentially be claimed as an unlawful deduction from wages, subject to time limits and, in ongoing series-of-deductions claims, a statutory backstop that limits how far back a claim can reach. Because the position is fact-specific and the applicable time limits can be complex, employers who discover a historic calculation error should get advice from ACAS or a qualified employment solicitor rather than assuming a fixed cut-off applies.

Why does this matter more since the new 6-year record-keeping duty?

Since 6 April 2026, UK employers have a statutory duty to keep adequate holiday pay and working time records for 6 years, with breach of the underlying record-keeping requirement treated as a criminal offence under Regulation 29 of the Working Time Regulations. Overtime- and commission-linked holiday pay is one of the most error-prone calculations to get right and document, making it a likely focus for Fair Work Agency inspections and tribunal scrutiny going forward.

This article is provided for general information only and does not constitute legal advice. Employment law is fact-specific, and case law in this area continues to develop. For guidance on a specific situation, contact ACAS (Advisory, Conciliation and Arbitration Service) or a qualified employment solicitor.