Holiday pay – where are we now?
The employment tribunal in Lock v British Gas Trading Ltd confirmed last week that commission payments should be included in holiday pay calculations and that the Working Time Regulations can be read in a way which gives effect to that. Unfortunately, a number of unanswered questions remain.
What exactly is the issue?
The Working Time Directive gives employees the right to holiday pay, but does not explain how it should be calculated. Last year the European Court of Justice decided that contractual sums that are inherently linked to performance of the individual – i.e. calculated and earned according to whether and how much work is done – should be included in the calculation. This means that commission, overtime, some types of bonus and shift allowances may all have to be included. Not all employers currently calculate holiday pay for workers with normal working hours in this way.
What did the employment tribunal in Lock decide?
Mr Lock is a sales consultant with British Gas who claimed that his holiday pay should include a sum representing the commission he earned on sales. The European Court of Justice decided that Mr Lock’s holiday pay should comprise both his basic salary and an amount equal to the commission he would ordinarily earn while at work. The case then went back to the Leicester tribunal which decided last week that:
- Commission should be included in holiday pay calculations (which we already knew);
- Non-guaranteed overtime should also be included, confirming the earlier decision in Bear Scotland Ltd v Fulton (non-guaranteed overtime is overtime workers are contractually required to work if asked to but which the employer is not obliged to offer);
- The Working Time Regulations can be read (by adding additional words) in a way which makes them consistent with the decisions of the ECJ that holiday pay should include all sums regularly earned as normal pay. There is, therefore, no need to amend the Regulations.
What is still not clear?
- The claim by Mr Lock was only concerned with commission. The judge was not required to make a formal ruling in relation to other pay elements such as voluntary overtime, discretionary bonuses etc. The general nature of his comments, however, suggests that if normal pay tends to include regularly worked but genuinely voluntary overtime it should be included. There are of course grey lines about when voluntary overtime becomes sufficiently settled to count.
- The judge suggested that employees receiving payments such as commission and overtime should be treated as employees whose remuneration varies with the amount of work done rather than those with ‘normal working hours’ – in terms of the Working Time Regulations this means calculating holiday pay using a 12 week average immediately prior to each leave period. However, the correct reference period is to be decided on at a future hearing in Lock.
- In Lock, the parties were agreed that commission should only be included in the calculation of holiday pay for the four weeks ‘Euro leave’ (and not the additional 1.6 weeks provided under the Working Time Regulations) so the court did not deal any further with that. It now seems to be accepted that the European decisions on calculating holiday pay only relate to the four weeks, leaving employers to decide how to deal with the remaining 1.6 weeks. The difficulties with having two separate calculations for holiday pay may, however, put some employers off distinguishing between the two types of leave in practice.
- It is still not clear how to work out which holidays are Euro leave (to which the principles in Lock, Bear etc. apply) and which are the additional 1.6 weeks (which can usually be restricted to basic salary for those with normal working hours). Is Euro leave deemed to be the first four weeks taken in the year, or can either the employer or employee decide on a day to day basis? How should you account for carry over etc?
What happens next?
All holiday pay cases currently lodged with the employment tribunal system are frozen (“sisted” or “stayed”) pending the outcome of Lock – which will run its course (including any appeals) before they are allowed to proceed further. We do not yet know if last week’s tribunal decision will be appealed. A decision in the Lock case on how precisely to calculate holiday pay involving commission is not expected before the end of May.
How can we help?
Last week’s judgment in Lock arguably didn’t decide any fundamental issues but does suggest that tribunals may take a more inclusive approach in deciding which benefits, such as overtime, should be reflected in holiday pay. Rather than the Working Time Regulations being amended, we are more likely to see tribunals treating employees who receive overtime, commission and so on as individuals without normal working hours and using an average earnings approach over a reference period to determine holiday pay entitlement.
There is still no ‘one size fits all’ approach to the holiday pay issue and we are happy to talk it through with you. Please get in touch to discuss how we can help.