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What to do about holiday pay?

The European Court of Justice (ECJ) has issued its much anticipated decision in the case of Lock vs British Gas. As many predicted, the court held that commission payments must be taken into account when determining holiday pay.

The European Working Time Directive gives employees the right to four weeks’ paid annual leave. However, it does not confirm which elements of a worker’s remuneration should be included in holiday pay, or how it should be calculated each time leave is taken.

A salesman on a basic salary with variable commission brought a tribunal claim in respect of the commission he could not earn while on leave. The ECJ held that commission payments should be included in calculating holiday pay, as otherwise workers may be deterred from taking annual leave.

What about other payments?

Although this case only refers to commission payments, other types of payments, such as overtime, may have to be treated in the same way. 

The Lock judgement referred to sums “linked intrinsically to the performance of tasks that the worker is required to carry out” under his or her contract. This is arguably wide enough to include voluntary overtime, where it is frequently available and there is a degree of reliance by both parties that such overtime will be offered and accepted.

How should holiday pay be calculated?

The ECJ in Lock has referred this question back to the UK tribunal. Under the UK Working Time Regulations, the holiday pay of workers with no normal working hours is calculated as an average over the previous 12 working weeks. It remains to be seen what approach the tribunal takes in respect of workers with normal working hours. It may well adopt the same calculation, but could equally choose a different reference period or another method entirely.

The judgment only applies to the four weeks’ holiday provided by the European Working Time Directive. It does not cover the additional entitlement provided by the UK Working Time Regulations (currently a further eight days for full time workers) or any further entitlement in an employee’s contract. It applies to all workers, not just employees.

What is the practical impact?

Employers need first to consider the cost implications. They will have to identify which of their workers may be entitled to recover holiday pay arrears, and the amount in each case.

Claims may go back years if a series of occurrences can be established. The precise starting point remains to be established, but could be as early as 1998, when the Working Time Regulations were implemented, or later depending on where the claim is raised (five years before the last deduction in Scotland, six in England). Accurate personnel records will be essential.

Employers will then have to decide if it is prudent, and indeed affordable, to address the issue now or to wait and see what claims are made. Unions are likely to want to begin a dialogue about potential resolution immediately.

It will also be necessary to change payroll systems to recalculate holiday pay in future, and businesses may have to consider ways to offset enhanced payments to workers by amending or removing other benefits.

Brian Campbell is a legal director in the employment team of law firm Brodies