Employees to receive more holiday pay

Background to the case:

Lock was an energy trader whose remuneration consisted of basic pay plus commission on the sales he achieved.  Commission, on average, amounted for 60% of his income.  His holiday pay was calculated by reference to his basic salary only and did not reflect the commission element of his income.  Naturally, when Lock was on holiday he could not generate sales and therefore his income was significantly lower in the weeks following his return from holiday.

In 2014 Lock complained to an Employment Tribunal, arguing that his holiday pay did not comply with European legislation.  The Tribunal referred the case to the Court of Justice of the European Union (CJEU) and the CJEU agreed with Lock.  The matter was then remitted back to the Tribunal and it is this decision that has recently been published.

The decision:

The Tribunal adopted the approach taken by the EAT in Bear Scotland that the Working Time Regulations 1998 (WTR) were capable of being interpreted to reflect European legislation and held that commission should be included in the calculation of holiday pay.

The question is then, how should employers calculate holiday pay? Unhelpfully the Tribunal did not give clear guidance as there will be a further hearing looking at this point.  We are therefore left with the guidance from the EAT in Bear Scotland that holiday pay should be calculated on the basis of the employee’s average earnings in the preceding 12 weeks.

The further Lock hearing will also look at whether there is still a requirement to include commission in holiday pay calculations where an existing commission scheme is structured to compensate for annual leave.
It is still not clear whether voluntary overtime should be taken into account (i.e. overtime that the employer is not obliged to offer, and which, if offered, the worker is not required to do).

What does this mean?

An employee may claim an unlawful ‘deduction’ from wages if his/her employer has failed to pay the correct amount of holiday pay.

However, as a small comfort there are some limitations on such a claim:

1. The Tribunal confirmed that its decision was only relevant to the 4 week holiday period granted by regulation 13 of the WTR and not to the additional period of 1.6 weeks’ holiday granted by regulation 13A.

2. From 1 July 2015 back pay claims will be limited to 2 years following the new Deduction from Wages (Limitation) Regulations 2014 which came into force on 8 January 2014.

3. The EAT in Bear Scotland held that a gap of 3 months or more between underpayments would ‘break the series’ for the purposes of an unlawful deduction from wages claim. The EAT had granted permission to appeal to the Court of Appeal on this point however Unite, the trade union which represented some of the claimants in the appeals, has announced that it will not be appealing the EAT’s decision.

Whilst the limitations at point 2 and 3 above are very welcome, they may incentivise workers with existing claims for arrears of holiday pay to bring claims now, before the 2 year limitation period takes effect.

What should employers do now?

Whilst this decision by the Tribunal is not binding and is potentially subject to appeal, this decision following the EAT’s decision in Bear Scotland is a warning that employers must change their systems to ensure that holiday pay is correctly calculated going forward.

Holiday pay must be calculated to include all payments which are directly or intrinsically linked to the worker’s normal, day to day work.  This includes non-guaranteed overtime and commission payments as well as travel time payments which exceed expenses incurred and so amount to additional taxable remuneration.

The Employment Team