The holiday period is upon us, but has a ruling from the European Court of Justice (ECJ) turned a well-earned rest for employees into an expensive nightmare for employers?
The right for workers to take paid annual leave comes from European legislation. It is left to the different European countries to specify how statutory holiday pay should be calculated.
On the face of it, it should not be difficult to calculate holiday pay. But a number of cases over the past few years suggest otherwise. Historically, a worker who works normal working hours, and whose pay does not vary with amount of work done, has received basic salary without any additional bonuses or commission payments during their holiday period.
However, a recent ruling from the ECJ (Lock v British Gas Trading and others) found that if a worker’s remuneration includes commission which is ‘intrinsically linked’ to contractual duties (for example, a contractual right to commission on sales achieved) the European Directive precludes a national law (in the UK’s case the Working Time Regulations 1998) from calculating statutory holiday pay based on basic pay alone. The reason is that, if commission payments are not taken into account, the worker will be placed at a financial disadvantage when taking statutory holiday, since no commission will be generated during the holiday period. In such circumstances, a worker may be deterred from exercising the right to take annual leave, which would be contrary to the orignal purpose of the holiday legislation which was to preserve health and safety by ensuring workers take breaks.
In the case of Lock, his commission made up about 60% of salary and when he took annual leave he couldn’t generate commission and therefore his salary was lower in the months following a holiday. The fact that the reduction in pay occurred after the period of annual leave, was considered irrelevant and that Lock’s holiday pay should include an amount to reflect the commission he was unable to earn during period of annual leave. No indication was given as to how holiday pay might be calculated, although a current school of thought is to take the same approach as though the worker did not have normal working hours i.e. the average of the sums earned in the previous 12 weeks.
The principle applied in the Lock case is likely to apply to any variable pay such as overtime, shift allowances and work-based bonuses, where such payment is ‘intrinsically linked’ to the performance of the tasks and duties the worker is required to carry out. In fact, there are two cases which have been stayed and are waiting to be heard by the Employment Appeal Tribunal on whether overtime payments should be taken into account when calculating holiday pay. Previous case law found that where there are normal contractual hours of work but overtime or additional hours may be worked, statutory holiday pay is calculated with reference to the contractual hours only. However, following Lock if the overtime is ‘intrinsically linked to the performance of tasks which a worker is contractually required to perform’ then overtime may be included in the holiday pay calculation.
So where does this leave an employer?
This is an ECJ decision and it does not bind private sector employers. The Government will have to amend the Working Time Regulations 1998 or a ruling be made by the EAT or other higher court for private sector employers to be bound by this ruling.
That said, now would be a good time to review your holiday pay practices and assess your liability at this stage.
In addition to a possible future increase in holiday pay, your workers could potentially make claims for historical underpayments (although any such claims would be limited to the European statutory 4 weeks’ paid annual leave rather than then the 5.6 weeks’ entitlement enjoyed under the Working Time Regulations 1998) relating back several years.
An employer could increase holiday pay now but this could result in overpayments if the UK courts decide not to interpret UK law consistently with the ruling (although this is viewed as unlikely to happen) but this may also alert workers to possible claims for back payment. That said, it may actually be a boost to the workforce morale and once three months have passed since the last underpayment, workers are out of time to bring unlawful deductions/WTR claims.
If you would like to discuss holiday or holiday pay queries with a member of our team then please contact us on 0203 159 5172.