September 29, 2014

Does Holiday Pay include commission and overtime?

Holiday Pay has always been a controversial topic in Employment Law – but the most recent dispute is over whether holiday pay should include commission or overtime.

Surprisingly, until 1998, there was no legal entitlement to holiday leave or pay in the UK – even though most employers still provided it.

A European Directive first gave employees the right to Holiday Pay. Unfortunately, these are often interpreted differently in individual countries, leading to much litigation…

Commission…

Should workers be paid when they are on holiday and earn commission at the same time?

At first glance, it seems obvious…no. Why should someone benefit from commission which is not earned?

….but it’s not that straightforward.

The EU Working Time Directive (2003/88/EC) requires member states to ensure that workers have the right to paid annual leave of at least 4 weeks per year.

This is implemented in the UK by the Working Time Regulations 1998. In 2009, the UK increased this basic 4 weeks entitlement by 1.6 weeks. The EU Directive does not specify how payment for holiday leave should be calculated and it is up to each member state to provide for this in their domestic legislation.

This lack of clarity can (and very often does) lead to problems of interpretation and to litigation! The Working Time Regulations state that workers should be paid a week’s pay for each week of leave calculated in accordance with the Employment Rights Act.

The provisions of that Act have to date enabled employers to calculate EU statutory holiday based on basic pay only, excluding other payments such as commission or non-contractual overtime.

There are exceptions, where holiday pay for workers with no normal hours, must be based on their average pay for the preceding 12 weeks.

But for those with normal hours, an employer may exclude commission, bonus and non-contractual overtime from the calculations.

Lock v British Gas Trading was a claim by 2 employees in the Leicester employment Tribunal arguing that they should not be disadvantaged when they take holiday leave by suffering a reduction in their commission.

In the Lock case, the salary of the employees concerned was made up of about 60% commission.

The claims were referred to the European Court of Justice (ECJ) for a ruling on whether statutory holiday should include commission as it was intrinsically linked to the work done and formed part of ‘normal remuneration’.

The ECJ held that failing to pay workers commission in respect of periods when they were on holiday might thwart the aims of the Directive (a health and safety measure designed amongst other things to ensure workers receive appropriate periods of rest) in that failing to include commission could deter a worker from taking his statutory holiday entitlement.

The ECJ has referred the claims back to the Leicester Employment Tribunal to see whether the Working Time Regulations can be interpreted so as to give effect to the aims of the Directive. The hearing on this case is set for 20-21 October 2014.

At present and if or until there is a ruling, or UK law is amended to come in line with the Directive, the ECJ ruling only has direct effect on public bodies and not on private employers.

Industry is concerned that if the ruling is found in favour of the employees, this could result in substantial claims for back pay.

Note however, that the British Gas employees had a substantial element of their pay made up of commission and it would be interesting to see the courts interpret cases in which commission represents only a small amount of pay, in other words where it does not represent a significant deterrent from taking holiday entitlement.

For private sector employers no action is required at present until the law changes, other than perhaps reviewing financial exposure to potential back pay claims.

Overtime…

Recent Employment Tribunal decisions indicate that employers should comply with the overarching principle of the Working Time Directive that holiday pay should include not just basic salary but other payments which are ‘intrinsically linked to the performance of tasks’ (Pilots case of Williams v British Airways).

At present only overtime which is both compulsory and guaranteed needs to be included in calculations.

The workers in the Fulton case argued that regular (though not contractual) overtime should be included in holiday pay in accordance with the above principle and that in failing to do so the UK is not complying with the EU Directive.

The case of Fulton (joined with others) was heard in the Employment Appeal Tribunal (EAT) on 30-31 July 2014 and the Judgment is awaited.

It is not easy to see how the wording of the Working Time Regulations and the Employment Rights Act can be ‘bent’ to include non-compulsory overtime in circumstances where the Act specifically excludes it. It may be that the EAT refers the matter to the ECJ, but at the present time it is not law in the UK.

An adverse ruling could result in many employers (having interpreted the UK law in good faith) facing substantial claims for back pay. The Secretary of State for Business Innovation and Skills intervened and were represented in the EAT, indicating perhaps the strength of feeling amongst employers and the concerns and financial impact an adverse ruling might have.

What Action Do Employers need to take with regard to these Cases?

As discussed, if or until this principle becomes law in the UK, there is no requirement to take action to implement the rulings.  However it may be prudent for employers to assess the likely scale of financial impact of an adverse ruling.

Perhaps businesses should consider lobbying the Government through an appropriate body. Manufacturers Organisation the EEF, the CBI and the Institute of Directors have all reportedly been involved in lobbying efforts, opposing the rule on the grounds of adverse impact on business.

Unite the Union (and no doubt others) are pushing claims, issuing pro-forma letters to members. Any ET claims though are likely to be stayed pending further rulings.

It might be prudent to assess your potential financial exposure – It may be the case in your own organisation that any overtime is not regular and this would suggest it might not be caught by the rule in Fulton, or that commission makes up only a very small proportion of pay, in which case, the rule in Lock may not apply, alternatively that your financial exposure is quite limited.

You may wish to consider whether it would be prudent to limit any financial exposure by changing policy now in advance of an adverse finding. Before taking such a step please ensure that you seek and follow our advice.

It is also important to bear in mind that any ruling would apply to both employees and workers.

If considering a policy change, it would be important to be clear on whether this should apply to only the EC 4 weeks minimum, to the UK 5.6 weeks, or to your contractual entitlement if greater. Seek advice from Moorepay Compliance before implementing any change.

If any claims are lodged, please of course pass them to a member of our Compliance team in the normal way (litigation stage) or to our Advice Team if they are at the internal or pre-litigation stage (i.e. no formal claim but where a Solicitor or other agent is involved).

If all else fails – perhaps businesses should consider Richard Branson’s recently publicised ‘Non-Holiday’ policy!

Need help or advice? Contact us and we can assist you.

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