European Court of Justice rules on the calculation of holiday pay
UK employers required to include commission in calculating holiday pay for workers
The European Court of Justice (CJEU) recently issued its decision in the case of Lock v British Gas that where an employee's salary regularly includes contractual commission, that commission should be included when calculating holiday pay.
The claimant, Lock, was an energy sales consultant for British Gas, who received a basic salary, together with commission amounting to approximately 60 per cent of his total remuneration package. Under the terms of his employment, commission was payable after the sale was concluded, so Lock did not receive payment for several months.
Lock received a basic salary plus commission due from previous sales while on holiday over the Christmas period. He made no new sales during the holiday period, so his salary in future weeks was reduced. In the employment tribunal hearing Lock claimed that by paying him a reduced wage as a result of his holiday, British Gas had breached the Working Time Regulations.
The tribunal referred the matter to the CJEU, which held that Lock should not be disadvantaged for taking annual leave and commission must be taken into account when calculating statutory holiday pay.
Insolvent businesses that are still trading could also feel the full force of this new ruling and be stung by backdated claims for employees' extra holiday pay and, potentially, other payments too.
While this case only refers to commission payments, other types of income, such as overtime, may have to be treated in the same way. A set of joint appeals being considered by the Employment Appeal Tribunal (EAT) are expected to determine that employers will need to factor in payments including overtime and allowances.
It is expected that the CJEU ruling will lead to employers adjusting future holiday pay calculations and dealing with backdated claims for underpaid holiday pay.
Kevin Poulter is the editor at large of Solicitors Journal and senior associate specialising in employment at Bircham Dyson Bell "It would seem that the unions are mobilising and are preparing for an attack on British employers in the coming months. This activity follows the European Court of Justice's (CJEU) May decision in Lock v British Gas, which determined that the interpretation of 'normal remuneration' under domestic law was not as it should be. "The EU's Working Time Directive, introduced into British law in 1998, sets out the rules for the calculation and payment of holiday pay. Since then, employers have typically paid only basic pay when an employee has been on holiday. In Lock, however, the CJEU held that an employer should also take into account commission when calculating holiday pay. In that case, 60 per cent of pay was commission-based. "Further claims have also been made seeking clarification from the courts as to whether other payments are 'linked intrinsically to performance' and therefore 'normal remuneration' payable during holiday periods. These payments include overtime as well as other income, such as anti-social hours or shift allowance payments. Judgment is expected from the Employment Appeal Tribunal (EAT) at the end of October with a strong likelihood that whatever the decision, it is likely to be appealed. "Such is the significance of these cases that the UK government has already intervened. As the public sector is the country's biggest employer, it is not surprising that the costs of paying enhanced holiday pay, possibly going back as far as 1998, will be crippling. For private businesses, the risk of a finding in favour of employees could be crippling with experts warning that many will be left insolvent. Going forward, many SMEs could see an increase of 4 per cent in payroll costs. "The cumulative effect of this potential underpayment of holiday pay may result in significant and unexpected costs for employers. Long before the economic downturn, when manufacturing enjoyed a renaissance and construction was at a record level, overtime in particular became a normal part of the working week. Those good times may be over, but the enhanced holiday costs of such success could not come at a worse time for the businesses who have survived the recession. "In the event that the court finds that accounting for overtime is part of 'normal remuneration, the three month limitation period for claims to be brought means that only those who continue to be in employment with the same employer will be eligible. "Calls on the government to introduce emergency legislation to limit the effects of such a finding have, so far, fallen on deaf ears. MPs will have little power over the decision of the European courts, especially over a liability which could retrospectively apply over the past 16 years. "The unions may be pre-empting the decision of the courts at this time, but once handed down, there is likely to be a great deal of activity in a very short time. In all likelihood, any claims will be stayed pending what will surely be a lengthy appeal process, even if it only goes to delay what now seems to be inevitable." |
'Delaying the inevitable'