Employers should note a recent decision regarding holiday pay. Employees who are paid wholly or partly by commission should receive holiday pay which reflects this.
In Lock v British Gas Trading Limited and others C – 539/12, the tribunal referred the case to the Court of Justice of the European Union (CJEU) to ask if the Working Time Directive requires commission to be included in holiday pay. The CJEU held that because commission was intrinsically linked to the performance of the tasks the employee was required to carry out under his contract of employment, it must be taken into account when calculating holiday pay. The CJEU left the method of calculation as a matter for the national courts to decide by taking into account the CJEU case law on paid leave, and the purpose of the Working Time Directive which is to encourage workers to take the paid leave they are entitled to.
Every worker is entitled to 4 weeks’ paid annual leave by virtue of Regulation 13 of the Working Time Regulations 1998 which implements the Working Time Directive 2003/88/EC. UK workers are entitled to a further 1.6 weeks under UK legislation.For each week of annual leave entitlement, an employee should receive the equivalent of a “week’s pay” in accordance with sections 221-224 of the Employment Rights Act 1996. A “week’s pay” is:
- If an employee’s working hours do not vary, the pay due for the basic contracted hours.
- For workers on normal working hours, getting fixed wages for working fixed hours, the net fixed wage, including any fixed amounts normally paid on a regular basis (for example, bonuses or commission). Overtime is not counted except to the extent you are required to provide it in your contract with the employee, and they are required to work it.
- If a worker has no normal working hours, the average pay received over the preceding 12 weeks in which they were paid.
- For shift workers, a week’s holiday pay equals the average number of hours worked in the previous 12 weeks at the average hourly rate.
However recent litigation has complicated matters.
In 2011, the European Court of Justice ruled that a worker on holiday is entitled not only to basic salary, but also to remuneration “intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment and in respect of which a monetary amount, included in the calculation of his total remuneration, is provided”. (Williams and others v British Airways plc  IRLR 948)
In a recent case, Neal v Freightliner Ltd ET/1315342/12, Mr Neal’s contract provided for a 35-hour week made up of 7-hour shifts, and that he “may be required to work overtime when necessary”. He regularly worked longer shifts and received a premium overtime rate for the additional hours. The employment tribunal found that the result of Williams is that a worker might be entitled, during the four weeks’ leave provided by the Directive, to receive holiday pay in excess of his basic salary. Other components must be taken into account if they are intrinsically linked to performing tasks that the worker is required to carry out under the employment contract.
The employment judge in the Neal case went on to find that Mr Neal’s shift premiums and overtime were “intrinsically linked” to the performance of the tasks he was required to carry out under his contract and hence were part of the holiday pay calculation. The tasks Mr Neal was performing during overtime were the same tasks he was required to perform under his contract of employment. The fact that his overtime was voluntary was irrelevant.
This finding only applied to the 4 weeks minimum holiday required by the EU Directive. It did not apply to the additional 1.6 weeks and so the holiday pay for the additional 1.6 weeks will still be governed by the existing rules.
Mr Neal’s case was only at employment tribunal level and is not therefore binding on other tribunals. However, his employer has now submitted an appeal against the tribunal decision to the Employment Appeal Tribunal.
Relevance for Employers
Holiday pay is considered wages under the Working Time Regulations and the Employment Rights Act and failure to pay the correct amount of wages allows an employee to bring a claim of unlawful deduction of wages.
If the employment judge in the Neal case is right, which would appear to be the case given the recent finding of the CJEU in Lock, it could be that many employers have large historic liabilities for holiday pay, calculated without reference to overtime. Such claims can potentially go back some time on the basis of there having been a series of deductions.
Employers who pay overtime may want to think about making some contingency for holiday pay claims by your workers. One way to deal with this would be to negotiate with staff to agree the level of backdated holiday pay owed and then make that payment.
Employers could also start calculating holiday pay now to take account of overtime, commission etc.Cheryl Hogg Trainee Solicitor – Employment Law