If your staff earn overtime, commission or work variable hours, a week's holiday pay is probably not the same as their basic weekly wage. Getting it wrong has always been a risk. Since April 2026, employers have also been under a statutory duty to keep holiday pay records, enforced by a new government body.
This article explains what average holiday pay is, how the Lock v British Gas case shaped the law, what the Fair Work Agency means for employers, and how to calculate holiday pay correctly.
What average holiday pay means
Holiday pay should reflect what a worker normally earns, so they aren't put off taking holiday. For someone on a fixed salary with fixed hours, that's simple: a week's holiday pay is a normal week's pay.
It gets harder when pay goes up and down. If a worker's hours or pay vary, you work out an average over a reference period instead. This usually affects:
- Staff who earn regular overtime
- Salespeople and others on commission
- Shift workers with varying hours or shift premiums
- Staff who receive bonuses or allowances linked to the work they do
Irregular-hours and part-year workers have their own rules. For leave years starting on or after 1 April 2024, their holiday can accrue at 12.07% of hours worked, and employers can choose to pay rolled-up holiday pay. That's a separate topic, so this blog focuses on staff with variable pay.
Lock v British Gas: why commission counts
Lock v British Gas is the case that established commission must be included in holiday pay. Mr Lock was a British Gas sales consultant, and around 60% of his pay came from monthly commission.
The issue was this. When he took holiday, he received his basic pay plus commission from sales made before his leave. But while he was away, he wasn't making new sales. So in the months after his holiday his pay dropped, which in practice penalised him for taking leave.
How the case played out:
- 2012: Mr Lock brought a claim in the employment tribunal
- 2014: The European Court of Justice ruled that his commission counted as normal pay and had to be included in holiday pay
- 2016: The Court of Appeal dismissed British Gas's appeal and confirmed UK law could be read to include commission. Around 918 similar claims against British Gas and thousands against other employers, had been put on hold waiting for the outcome
The Court of Appeal also upheld the earlier Bear Scotland decision, which said non-guaranteed overtime should be included in holiday pay too.
The principle is now written into the Working Time Regulations. For leave years starting on or after 1 April 2024, holiday pay for the first four weeks of leave must include commission, regular overtime and payments linked to the work someone does.
The Fair Work Agency and the six-year records duty
Since 6 April 2026, every employer must keep adequate records of holiday entitlement, holiday taken and how holiday pay was calculated, and keep them for six years. The Fair Work Agency launched the next day, on 7 April 2026, as a single body enforcing employment rights.
Employers don't need to produce six years of old records straight away. The six years run from April 2026 onwards.
In relation to holiday pay, the Agency can:
- Inspect business premises and interview workers
- Require records and evidence of compliance to be produced
- Seize documents or equipment
The risks if you don't keep records
- A criminal offence. Failing to keep adequate holiday records is a criminal offence, punishable by a fine.
- Paying it back, plus a penalty. If records show holiday pay was underpaid, the Agency will be able to demand the arrears and add a penalty on top
- Proposed penalties of up to 200% of arrears. A government consultation proposes penalties of up to 200% of what's owed, capped at £20,000 per worker, with enforcement from 2027. Publicly naming employers, as already happens for minimum wage breaches, may follow.
- Looking back six years. The Agency is proposed to be able to investigate claims going back six years, but only for underpayments on or after 18 December 2025.
The penalty figures and enforcement timings are still proposals, so expect the detail to firm up during 2027. What isn't a proposal is the duty to keep records, which applies now.
How to calculate average holiday pay
Week’s holiday pay = total pay in the reference period ÷ number of paid weeks used
A week's holiday pay for someone with variable pay is their total pay over the last 52 paid weeks, divided by 52.
In relation to holiday pay, the Agency can:
- Inspect business premises and interview workers
- Require records and evidence of compliance to be produced
- Seize documents or equipment
The risks if you don't keep records
- A criminal offence. Failing to keep adequate holiday records is a criminal offence, punishable by a fine.
- Paying it back, plus a penalty. If records show holiday pay was underpaid, the Agency will be able to demand the arrears and add a penalty on top
- Proposed penalties of up to 200% of arrears. A government consultation proposes penalties of up to 200% of what's owed, capped at £20,000 per worker, with enforcement from 2027. Publicly naming employers, as already happens for minimum wage breaches, may follow.
- Looking back six years. The Agency is proposed to be able to investigate claims going back six years, but only for underpayments on or after 18 December 2025.
The penalty figures and enforcement timings are still proposals, so expect the detail to firm up during 2027. What isn't a proposal is the duty to keep records, which applies now.
How to calculate average holiday pay
A week's holiday pay for someone with variable pay is their total pay over the last 52 paid weeks, divided by 52.
- Pick the reference period. Go back from the start of the holiday and use the last 52 weeks in which the worker was paid.
- Skip weeks with no pay. Leave them out and go further back to replace them, up to a maximum of 104 weeks.
- Add up the pay. Include basic pay plus regular overtime, commission, shift premiums and bonuses linked to the work.
- Divide. Divide the total by the number of weeks you used. That's one week's holiday pay.
- Convert to a day rate if needed. Divide the weekly figure by the number of days they normally work in a week.
If someone has worked for you for less than 52 weeks, use the complete weeks they have worked so far.
Worked example
Sam is a sales consultant who works five days a week. Over the last 52 paid weeks, Sam earned:
| Pay element | Total over 52 weeks |
| Basic pay (£500 a week) | £26,000 |
| Regular overtime | £2,600 |
| Commission | £5,200 |
| Total | £33,800 |
£33,800 ÷ 52 = £650 a week, or £130 a day. If you paid Sam only their basic £500 a week while on holiday, you'd underpay them by £150 for every week of leave.
The statutory 5.6 weeks splits into 4 weeks and an extra 1.6 weeks. The broader "normal pay" rules, including commission and overtime, apply to the first 4 weeks. The extra 1.6 weeks can be calculated more narrowly, but many employers pay the same rate for all 5.6 weeks for consistency. Check your contracts before you decide.
Common mistakes and a quick checklist
The most common mistake is paying basic pay only for holiday, because that's what payroll defaults to. Others include:
- Counting unpaid weeks, such as sick leave with no pay, which drags the average down
- Forgetting commission paid in arrears, or overtime that's worked regularly but isn't guaranteed
- Using the wrong reference period, or not updating it for each holiday
- Keeping informal or incomplete holiday records that couldn't be produced on request
A quick checklist to work through:
- ☐ List which staff have variable pay: overtime, commission, bonuses or shift premiums
- ☐ Check payroll includes those elements in holiday pay for the first 4 weeks
- ☐ Check unpaid weeks are skipped, going back up to 104 weeks
- ☐ Record entitlement, holiday taken, carry-over and how each payment was calculated
- ☐ Make sure records are kept for six years, including for leavers
- ☐ Check contracts and your holiday policy match what you actually do
How HR PPL can help
Holiday pay errors often go unnoticed for years and can build into significant liabilities. With the Fair Work Agency now able to ask for your records, now is the time to review your approach.
At HR PPL, I can review how you calculate holiday pay, check your records would stand up to a Fair Work Agency request, and update your contracts and holiday policy. Get in touch at natasha@hrppl.co.uk or visit www.hrppl.co.uk.
This blog is general guidance, not legal advice. Holiday pay rules for irregular-hours and part-year workers differ, and the Fair Work Agency's penalty proposals may change.
