Holiday pay time-bomb

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As employees return from the summer holidays, employers will not be pleased to hear that the holiday period is set to become more costly.

The European Court of Justice decided recently, in the case of Lock v British Gas, that where an employee’s pay includes contractual commission, that commission should be included when calculating holiday pay.

Mr Lock was an energy sales consultant for British Gas. He received a basic salary, together with commission which made up approximately 60% of his remuneration. Commission was payable after the sale was concluded, so he did not receive it for several months.

Mr Lock was on holiday over Christmas, and received basic salary plus commission that was due from previous sales. He was not making new sales during the holiday period, so his salary in future weeks was reduced. In the employment tribunal he claimed that by paying him a reduced income as a result of his holiday, his employer had breached Working Time Regulations.

Employees are entitled to receive 5.6 weeks’ paid holiday per year. This is more generous than EU law, which provides for 4 weeks’ paid holiday, so Mr Lock limited his claim to 4 weeks’ increased pay.

The ET referred the matter to the ECJ, which held that Mr Lock should not be disadvantaged for taking annual leave, so commission must be taken into account when calculating his statutory holiday pay.

This ruling means that where an employee’s commission is intrinsically linked to their role, then all statutory holiday entitlement should include an amount to represent the commission the employee would have earned had they not been on holiday.

The EAT heard two further cases at the end of July on a similar point - whether overtime payments should be included in statutory holiday pay. The EAT decision has not yet been made, but it is likely to conclude overtime payments should be included in the calculation of holiday pay.

There is a ticking time-bomb awaiting all employers who have employees on commission or overtime arrangements.

Current employees are likely to be able to claim for extra holiday payments going back many years. Employers are advised to carry out an audit and take legal advice on whether the risk can be reduced for the future, and to alert their accountants to the possibility of latent claims.