Calculating Holiday Pay

Regular readers of our Bulletin will be well aware of an on-going line of cases focussing on the issue of holiday pay.

In the aftermath of the ECJ’s decision in British Gas v Lock, it is worth reminding readers what the current employment landscape looks like in this respect.

Whilst the case was remitted back to the Tribunal and as a consequence, a number of issues remain outstanding, a detailed explanation of the decision can be found here:-

http://www.irwinmitchell.com/newsandmedia/2014/May/ecj-confirms-commission-must-be-included-in-calculating-holiday-pay-JQ-767835

In short, the Court confirmed that holiday pay must include commission payments where they are intrinsically linked to the role they perform under their contract of employment, and that a worker should not be disadvantaged by taking annual leave as a result.

The ECJ’s decision is based on an analysis of the Working Time Directive.  This is directly applicable to public sector employers but is actually implemented in the UK by the Working Time Regulations which apply to all employers.  Now that the case has been referred back to the Leicester Employment Tribunal, their task will be to see whether they can interpret the existing Working Time Regulations (and the week’s pay provisions in the Employment Rights Act 1996) in such a way that they comply with the ECJ’s judgment.  Previous experience suggests that this is likely to happen.  However, it may be some time before the case is finally concluded.

Going forward, employers should therefore be aware of a number of key points:-

• It appears that the decision only relates to statutory holidays, and not to any contractual leave that is offered over and above the statutory entitlement;
• A reference period should be used to calculate holiday pay. It is unclear what this period should be, and the ECJ did not follow an earlier suggestion from the Advocate General that a reference period of 12 months should be used. In practice, it seems much more likely that a period of 12 weeks (already used in the UK under the Working Time Regulations) will be used;
• There may be circumstances where the link between an employee’s performance and the receipt of a subsequent commission payment, is so remote, that the employer could argue that holidays can be calculated at a rate of pay without having recourse to commission. For example, where commission is received in relation to the future performance of a contract, initially secured by the employee some years earlier; and
• Strictly speaking, employers could be liable for shortfalls in holiday pay going back 16 years, to when the Working Time Regulations came into force. Whilst Tribunal and Court limitation windows usually expire after 3 months and 6 years respectively, shortfalls in holiday pay forming part of a ‘series’, could still be within time, leaving employers with potentially large liabilities going forwards.

Employers should be mindful of the above points when dealing with holiday pay issues going forwards, ensuring that the rate of pay is calculated by reference to commission payments where appropriate.

As an aside, it should be remembered that at the end of July, the Employment Appeals Tribunal is set to hear the cases of Freightliner and Fulton, which will add further clarity to the issues considered in the British Gas case, but, in the context of overtime (rather than commission).