Holiday Blues

The calculation of holiday pay has been a hot topic in both Europe and the UK over the summer months, and with the announcement of the Employment Appeal Tribunal decision today, the calculation of holiday pay now has further implications for employers.

Background

The recent legal cases have looked at what elements make up pay, and therefore as a result what should be included when calculating pay in respect of statutory holiday periods.

The European Court established in Lock vs British Gas Ltd [2014] that if commission (or any other element of pay) is “intrinsically linked to the worker’s performance of tasks under his contract of employment” it should be included when calculating pay.

In this case, Mr Lock’s pay was made up of two elements

• a basic monthly salary; and
• sales commission.

The latter made up approximately 60% of his monthly earnings. Commission would be earned on a monthly basis, however would be paid retrospectively.

As Mr Lock’s holiday pay was calculated on the basis of his basic pay only, this resulted in him being placed at a financial disadvantage after a period of leave.

The European Court said this was contrary to the purpose of annual leave in the Working Time Directive and so the commission had to be taken in to account.

The Employment Appeal Tribunal today in Hertel, Amec v Wood and others co-joined with Bear Scotland Ltd v Fulton established that overtime pay should also be taken into account when calculating holiday pay entitlements.

So what does this mean?

With the legal decisions all employers now need to consider what pay elements should be taken into account when calculating holiday pay.

Therefore if employees pay includes elements such as  commission, productivity bonuses and allowances,  overtime etc employers will need to rethink how holiday pay is calculated.

The potential liability for employers also remains uncertain. Some commentators have suggested claims may be back-dated as far as the implementation of the Working Time Regulations in 1998, whilst others have suggested that claims should mirror the six year limitation period for equal pay claims. However, the door is now firmly open for back pay claims.

Claims companies are already springing up offering to lodge such claims en masse on behalf of employees.  Wise employers will review their holiday pay practices now and mitigate the risk of back pay claims before they start to flow in.

For further information and advice on what to do if you think you might have a problem with holiday pay, give us a call on 0808 168 5780 or email [email protected]