The European Court of Justice (ECJ) has handed down judgment in a case that could mean that employers face enormous liabilities for claims for holiday pay.
There is an apparent conflict between UK and European law as to how holiday pay should be calculated and whether elements of remuneration such as overtime and commission must be included.
The UK Working Time Regulations ("WTR"), state that a worker is entitled to be paid during statutory annual leave at a rate of a week's pay for each week of leave. If the worker has normal working hours but their pay varies, they are entitled to holiday pay based on their average pay during those normal working hours over the previous 12 working weeks. Until recently, only payments due under the employment contract for normal working hours were taken into account for these purposes.
However, at the end of last year, in the case of British Gas v Lock, it was stated that the European Working Time Directive ("Directive”) requires commission to be taken into account where this is directly linked to the work carried out under the employment contract. The ECJ has now decided that this case should be followed in the UK.
Mr Lock was a sales consultant for British Gas receiving a basic salary and variable commission on a monthly basis. His commission makes up about 60% of his pay. The amount of commission varied depending on the number and type of sales he achieved, paid at the time the sales contract was entered into and not when Mr Lock actually carried out the work to achieve the sale.
Mr Lock took holiday from 19 December 2011 to 3 January 2012 during which time he was paid basic pay and the commission he had earned on sales contracts entered into in the previous weeks. However, as he did no work during his holiday, he did not generate any sales and therefore his salary was lower in the months following him taking holiday as he received no commission, and therefore he "lost" income by taking his holiday.
Mr Lock brought a claim for his "lost" holiday pay in the Employment Tribunal. The question of whether commission should be included in holiday pay and, if so, how this should be calculated, was referred to the ECJ by the Employment Tribunal.
Mr Lock won; the ECJ found he might be deterred from taking annual leave if he was financially worse off as a result, and it is an important principle of European law that workers are not deterred from taking annual leave.
Mr Lock is therefore entitled to payment for the hypothetical commission that he would have earned during his holiday. An Employment Tribunal will now determine how that should be calculated.
Businesses should review their holiday policies to consider whether any amendments are required in order to ensure workers are not deterred from taking leave. Workers who are paid wholly or partly by commission should have that entitlement reflected in their holiday pay.
The one comfort for hard-hit employers is that the decision is likely to apply only to the four weeks' holiday under the WTR, not the full 5.6 weeks specified by the WTR or any additional contractual holiday. This point should be confirmed by the Employment Tribunal in due course. It remains open to debate how this will be calculated in practice. The worry is that this will leave businesses struggling with what are already complex and costly rules around holiday pay.