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21 July 2014

Avoid costly claims on holiday pay and unearned commission

In light of the recent rulings in a series of cases on the correct calculation of holiday pay, employers are advised to urgently review their contractual leave arrangements. For employers with large workforces, potential claims could prove costly if not addressed now.  Furthermore, the judgment may also have implications for pension entitlements where these are calculated based on variable earnings.

Please contact a member of the employment law team at B P Collins if you need advice on reviewing your contractual leave arrangements on 01753 279029 or email employmentlaw@bpcollins.co.uk.

Case overview

In Lock v British Gas Trading Limited and Others, the Court of Justice of the European Union (CJEU) has confirmed that the EU Working Time Directive (WTD) requires that the holiday pay of an employee whose normal remuneration is made up of a basic salary plus variable commission should include an amount equivalent to the sum he would have earned by way of commission had he been working rather than on annual leave. 

Mr Lock's normal pay included a commission based on sales in the previous month, on average, this represented more than 60 per cent of his remuneration.  As he could not achieve sales whilst on annual leave, this meant that his pay for the month following his holiday was considerably lower than usual.  As such, he brought an Employment Tribunal (ET) claim for outstanding holiday pay.

The ET referred the matter to the CJEU, asking whether, in such circumstances, the WTD required commission to be included in holiday pay and, if so, how it should be calculated.

The CJEU concluded that Mr Lock's holiday pay should include commission. The right to paid annual leave is an important principle of EU law, the purpose of which is to allow a worker time to rest and enjoy a period of 'relaxation and leisure'. Such a reduction in a worker's remuneration in respect of his paid annual leave could be liable to deter him from exercising his right to take that leave and so was contrary to the objective pursued by the WTD.

As regards how the commission-based element of holiday pay should be calculated, the CJEU considered this must be assessed by the national court or tribunal on the basis of the rules and criteria set out by the case law of the CJEU and in the light of the objective pursued by the WTD.

The ruling highlighted that holiday pay of just basic salary on its own is not sufficient if this is not the worker's normal remuneration.  The ramifications of this are dramatic as it appears that any payment which is 'linked intrinsically to the performance of the tasks which the worker is contractually required to carry out under his contract of employment' should be included in holiday pay. 

As we go to press, the EAT is already considering a trio of cases where employees seek payment of overtime on the basis that, while they were on holiday, no payment was made in respect of overtime, although this was a payment  'linked intrinsically to the performance of the tasks which the worker is contractually required to carry out”.  If successful, the employees will seek payment in respect of overtime going back up to 1998, when the Working Time Regulations came into force.

Employers wishing to limit their exposure to similar claims should contact Jo Davis at B P Collins LLP for urgent advice on 01753 279029 or email employmentlaw@bpcollins.co.uk

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