Sarah Rushton finds that a recent employment tribunal ruling will change the way holiday pay is calculated
Recent successful challenges to how holiday pay is calculated could have a significant impact where employees’ commissions are high, and could mean that some employees earn more on holiday than at work. There are likely to be further challenges and employers may wish to consider their commission arrangements.
For employees who work regular hours, holiday pay has traditionally been based on basic salary, ignoring matters such as commission and non-compulsory overtime. However, Lock v British Gas, decided by the employment tribunal on 23 March, is the latest in a string of decisions to challenge that position.
The facts
Mr Lock worked normal hours. He had basic pay but his commission on sales made up more than half his package. He said his commission needed to be taken into account when calculating his holiday pay. His was a test case at the ECJ for multiple claimants.
Although his commission varied, the ECJ decided in May 2014 that it should be regarded as a normal part of his salary as it was linked to the work he did. The court found that, due to the financial disadvantage he would suffer, he could be deterred from taking holiday, contrary to the purpose of the Working Time Directive (WTD) (see below).
However, the ECJ left it to the UK Employment Tribunal to work out how the ruling should be applied to calculating holiday pay. As a result, the employment tribunal added the following paragraph to regulation 16(3) of the Working Time Regulations 1998 (WTR) (see below):
“(e) as if, in the case of the entitlement under regulation 13, a worker with normal working hours whose remuneration includes commission or similar payments shall be deemed to have remuneration which varies with the amount of work done for the purposes of section 221.”
It may seem bizarre that an employment tribunal can add words into a piece of legislation, but where a domestic law is derived from a directive, the courts have an obligation to look at the whole body of law from which it is derived. There will be a further tribunal decision in this case about the reference period and how to quantify claims.
Background
The holiday pay issue arises from European legislation. Under the WTD, member states must ensure that workers have the right to at least four weeks’ paid holiday per year. The WTD is implemented in the UK by the WTR, providing workers in the UK with 5.6 weeks’ annual leave (28 days including any bank and public holidays).
Workers are entitled to one week’s pay for each week of holiday leave under the WTR. To work out what is a week’s pay, employers look to the Employment Rights Act 1996.
λ If the worker has no normal working hours, a week’s pay is calculated as an average of remuneration earned in the previous 12 working weeks, including bonuses, overtime, commission etc.
λ A worker who has “normal working hours” will have their week’s pay calculated with reference to those hours. This generally means basic pay only.
λ For employees with normal working hours whose pay varies, by reference to hours worked or the amount done, a week’s pay is calculated using the employee’s average remuneration over the previous 12 working weeks. Bonus and commission usually do not count because they do not vary according to the amount done, as commission is usually based on a specific result, eg a successful sale of a property.
Calculating holiday pay
Following Lock and other recent decisions, holiday pay should include an amount for:
- compulsory overtime: overtime that is not guaranteed but the worker must work if offered it;
- semi-voluntary overtime, which the worker could refuse on reasonable grounds;
- supplements for anti-social hours or being on call; and
- commission.
This is not straightforward. First, the decisions apply only to the four weeks’ holiday leave granted as a minimum under the WTD, not the additional 1.6 weeks allowed under the WTR. Employers may be required to calculate different periods of holiday leave at different rates, and employees can potentially manipulate holiday pay by taking leave immediately following a period of overtime or payment of commission. In some circumstances employees may be paid more while on holiday than at work.
Secondly, because the rules apply only to four of the 5.6 weeks’ holiday leave, it is not clear as to which four. Is it the first four weeks or can the employer choose?
Thirdly, it is not clear how the calculations will work. For employees on variable hours, holiday pay is calculated by taking the average weekly pay over a 12-week reference period. Logic would suggest that a week’s pay should be based on a similar referencing period where employees receive commission or overtime payments.
However, depending on the particular commission scheme in question, it may mean that some commission payments are excluded from the calculations, contrary to the intentions of the WTD. A 12-month reference period may be more appropriate.
If that were not difficult enough, there is the issue of arrears. For a while it was feared that there would be huge claims for non-payment of wages; cases have confirmed, however, that the ability to claim back pay in relation to historical holiday leave periods will be limited to claims that have arisen in the three-month period prior to issue of the claim. From July 2015, the government will also introduce a cap limiting most wage arrears claims to a two-year period.
The recent rulings are likely to affect a number of sectors, such as retail and utilities, where commission-based schemes are regularly used to incentivise staff. The property, construction and care sectors – including estate agencies, developers and care homes, which rely heavily on commission and overtime – could also be affected. The potential impact on these businesses facing higher wage bills could be significant.
Sarah Rushton is an employment partner at Moon Beever
