Tel: 0345 644 8955 (TPS Registered)

Happy holidays? Perhaps not for employers

The Working Time Directive gives workers the right to paid annual leave. In the UK, the Directive is given effect in the Working Time Regulations. These set out the basis of holiday pay at the rate of a week’s pay for each week of annual leave and a week’s pay is calculated in accordance with the Employment Rights Act.

From time to time the courts have been asked to rule on how a worker’s holiday pay should be calculated when the amount they earn fluctuates and in particular where a worker’s pay consists of various different elements, for example, basic pay and overtime or commission. Until now it had been thought that where a worker received a basic salary and commission payments as part of their remuneration, holiday pay would be based on the basic salary. But following a recent ruling by the European Court of Justice (ECJ) in Lock v British Gas, holiday pay should be increased to take account of the commission earned.

The facts were as follows. Mr Lock was a sales consultant for British Gas. He was paid a basic salary together with commission based on the sales he achieved. Mr Lock’s salary fluctuated because of the commission element, but on average his commission formed 60% of his salary. When Mr Lock took some leave during and after Christmas 2011, he was not able to earn any commission. He was paid his basic salary during the leave period and in consequence his salary that month was much lower than when he was working. Mr Lock’s subsequent complaint that his holiday pay should reflect both basic and commission was referred to the European Court of Justice (ECJ). The ECJ had to consider whether the original Directive required commission to be included within holiday pay and, if so, the basis for calculating pay during annual leave.

British Gas accepted that Mr Lock did not generate any commission during his holiday. The ECJ ruled that this adverse financial impact could have the effect of discouraging a worker from taking leave, which was contrary to the objective of the Working Time Directive.

In reaching its decision, the ECJ considered the case of British Airways plc v Williams and others. The Williams case involved the court in Lock decided that as commission is intrinsically linked to the performance of the tasks the worker is required to carry out under his contract of employment, it must be taken into account in calculating holiday pay. In the instant case commission was directly linked to Mr Lock’s normal work and, although it varied from month to month, it was sufficiently permanent for the commission to be regarded as part of his usual monthly pay.

Another holiday pay case dealing with the question of holiday pay calculation is Neal v Freightliner Ltd which is currently on appeal. Mr Neal was employed on a contract for 35 hours a week. The contract said that he could be required to work overtime and Mr Neil regularly did so. But when he took some holiday his pay was calculated on the basic 35 hours and did not take account of his regular overtime. Mr Neal argued successfully before the Birmingham employment tribunal that his holiday pay should have taken in to account all hours worked. Freightliner Ltd has appealed the decision.

The Lock decision is likely to have a significant impact on costs for employers - including which additional payments that would form part of a worker's salary should be included in holiday pay. If the EAT decides in Mr Neal’s favour the effect will be doubled. The law is not yet finally settled, but it is likely that this there will be changes to the way that holiday is calculated, so give some thought to the following points.

  • Consider your potential exposure if overtime and commission are included in holiday pay calculations and budget for it.
  • Find out whether your payroll system can deal with this change if it is needed.
  • Work out whether it would be more straightforward to pay all holiday pay at the enhanced rate or whether you can distinguish between the four weeks’ holiday entitlement conferred under the Working Time Directive, the additional 1.6 weeks’ UK statutory leave and any other contractual leave entitlements (additional leave and contractual holiday are not covered).
  • Think about the overtime arrangements offered to new employees.

Russell HR Consulting provides expert knowledge in HR solutions, employment law training and HR tools and resources to businesses across the UK.

Subscribe to our free monthly HR newsletter. Russell HR Consulting employment law newsletters are emailed automatically to our ever-growing number of subscribers every month.

Got any HR queries?

Contact us