Holiday pay – the saga continues.
In the last few years there has been a number of developments in the law around the extent of employees’ entitlement to holidays, whether it be accrual of holidays during periods of sick leave, or the amount which must be paid as holiday pay. Sadly for employers who would like nothing more than certainty, the position under UK law is still not altogether clear.
In a decision which will have a significant impact on employers who pay commission or overtime, the Court of Justice of the European Union (the “Court”) has decided that employers must pay employees their normal pay for any statutory holiday taken, and that normal pay must include the commission which the employee would have received if they had actually been working during the holiday.
Not only could this give rise to significant liability for employers in respect of payments for future statutory holiday, but also potentially for payments in respect of holidays which have already been taken, back as far as 1998, when the Working Time Regulations (the “Regulations”) were first introduced.
Lock v British Gas Trading Limited
The case involved a salesman who earned commission on sales – typically commission accounted for around 60% of his total earnings. Mr Lock took two weeks’ holiday and was paid holiday pay. He also received commission in respect of sales which he had made before going on holiday, and which just happened to fall due for payment while he was off. So, in fact during his holiday he received a sum which was roughly the same as his normal level of pay. However, after his holiday he received less pay, because he did not make any sales during the time he was on holiday.
Mr Lock complained arguing that he should have received a sum equating to his average commission as part of his holiday pay.
The Court noted that Mr Lock actually received a sum which was roughly the same as his normal level of pay. However, the key point said the Court was that paying him only basic pay in the period after he returned from holiday may deter him from taking his statutory holiday entitlement.
It is worth noting this decision relates only to the 4 weeks of the 5.6 weeks’ statutory holiday to which employees in the UK are currently entitled. Employers are not required to pay commission in respect of the additional 1.6 weeks of holiday required under the Regulations or any additional contractual holiday entitlement over and above that. It is perhaps questionable however whether it will be practical to calculate the two different elements of holiday pay in different ways.
It will now be up to the ET to decide whether the Working Time Regulations can be interpreted in such a way that they say commission has to be included in the calculation of holiday pay.
The UK courts have shown a willingness to interpret UK laws very widely to make sure they fit within European law, so it should come as no surprise if the ET here does just that. If the ET does that, employers who have not included commission in holiday pay (as is commonly the case) could find themselves faced with claims for underpayment in respect of holidays which have already been taken, back as far as 1998, when the Regulations were first introduced.
If the ET decides that the Regulations cannot be interpreted to say commission has to be included in the calculation of holiday pay, private sector employers will not be liable for underpayment of holiday pay. In that scenario; employees would have to sue the UK Government for failure to implement the Working Time Directive properly.
Although the Court’s decision clearly sets out the broad legal principle to be applied, a few issues remain unclear:
- Do we know what counts towards an employee’s normal pay?
The Court held that normal pay includes those payments which are essentially linked to the employee’s duties, so for a sales employee commission will normally be included. It therefore seems likely that it would also include regular overtime, and shift allowances if these are regularly paid to the employee. The position with respect to overtime should be clarified later this year when two cases involving overtime are heard by the EAT.
- How do we calculate the amount of commission to include?
The Court suggested looking back over a 12 month reference period to assess how much commission on average has been paid. Under UK law, the reference period for wages related calculations is 12 weeks, so we think that is a more likely outcome.
- How far back will employees be able to claim underpaid holiday pay?
If the ET decides the Regulations can be interpreted in such a way that they say commission has to be included in the calculation of holiday pay, employees who have been underpaid holiday pay will be able bring claims for unlawful deductions from wages.
In respect of historic underpayments, there is likely little that can be done apart from amending what counts as holiday pay for future holidays (adopting a cautious approach as to what should be included to mitigate the potential for ongoing claims) and then hope that employees do not bring a claim (to the extent they have not already) in respect of previous underpaid holidays.
Where, as would be the case here, there has been a series of deductions, unlawful deductions claims have to be brought within three months following the last in the series of deductions, so there would be an element of having to wait and see how many claims are then brought in respect of underpayments up to the date on which the change is made. Of course, unions (and well advised non-union employee reps) will be alive to any steps designed to limit exposure for historic claims, so consideration of the make up of your workforce may well influence whether that is considered to be an advisable approach.
Then there is the question of those who have already brought claims – it may be that an employee who was employed when the Regulations came into force in 1998 and is still employed by the same employer may be able to claim for underpayments of holiday pay going right back to 1998.
If you pay commission or overtime:
- assess which of your employees this will affect
- begin assessing the potential extra costs involved, and take advice as to whether it may be possible to close off liability
- in respect of holiday pay in the future, consider commission/ overtime when agreeing to additional elements of pay like commission/ overtime.
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