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Holiday Pay Update - Commission

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Leicester Employment Tribunal has delivered its judgment concerning the inclusion of commission in holiday pay (in the case of Lock and ors v British Gas Trading Ltd).

On 22 May 2014 the Court of Justice of the European Union (“CJEU”) confirmed that the European Working Time Directive (“European Directive”) requires commission payments to be included when calculating 4 weeks of holiday pay in each holiday year.

Leicester Employment Tribunal has now added words into the Working Time Regulations 1998 (“WTR”) to ensure that this UK legislation is consistent with the CJEU judgment.

This means that the CJEU’s decision will have immediate and retrospective effect for UK employers. There is no need for Parliament to re-draft the WTR and introduce the change from a specific future date. 

The Tribunal confirmed that holiday pay inclusive of commission must be calculated on the basis of an employee’s average hourly pay rate (inclusive of commission) multiplied by their normal weekly working hours (as set out in their employment contract).

However, the Tribunal expressly set aside the determination of the correct reference period which employers should use to calculate holiday pay for a later date.  

It was however, agreed that commission payments must only be included to calculate 4 weeks of holiday pay during each holiday year. Therefore, the principle of the CJEU’s decision was not extended to the additional 1.6 weeks of holiday entitlement provided to workers in the UK by the WTR.

Recent Related Cases

In November 2014 the Employment Appeal Tribunal confirmed that non-guaranteed overtime (i.e. overtime, which is not guaranteed by the employer, but which the employee is obliged to work, if it is offered), should be included in the calculation of holiday pay.

The Judge in that case noted that the recent case law from the CJEU had made it clear that, under the European Directive:

However, the Judge limited the back pay claims which employees could bring in respect of previous holiday pay to those with a series of holiday pay deductions where there is no break of more than 3 months between them (save for in exceptional circumstances).

Further, it was confirmed that payment for the additional 1.6 weeks’ leave provided by the WTR, will not form part of a series of holiday pay deductions. Therefore, back pay claims for holiday are potentially severely limited because the period during which the additional 1.6 weeks’ holiday is taken each year will increase the chance of a 3 month break in the series.

It is likely that this decision will also apply to back pay claims for holiday pay based on a failure to include commission.

New Regulations

In December 2014 the Government introduced regulations with the aim of:

  1. limiting all unlawful deductions claims (including those relating to holiday pay) to the two years before the date the claim is lodged with the Employment Tribunal (with the exception of certain specific categories); and
  2. limiting breach of contract claims for holiday pay (which can be brought up to 6 years after the alleged breach) by excluding the right to paid holiday from being incorporated as a term in employment contracts.

These new regulations should assist employers to avoid substantial back pay claims for holiday pay stretching back for significant periods. However, the regulations do not apply to claims for unlawful deductions lodged with the Employment Tribunal before 1 July 2015. Therefore, employees still currently have an opportunity to bring such claims.

Actions for Employers

Employers may want to consider taking the following steps:

  1. Consider which employees receive commission and try to determine what other payments are included in each employee’s ‘normal pay’.
    You should assess what payments are intrinsically linked to the work they do and what payments are just one-off ancillary payments. Please get in touch if you have any questions on what sort of payments should be included. 
  2. Consider your risk in terms of claims for back pay, particularly if you have existing claims/complaints on the horizon. The likelihood of back pay claims will depend on when your employees have taken their holiday. We can assist with this exercise.
  3. Consider whether you will pay holiday at different rates (e.g. for the first 4 weeks and additional 1.6 weeks each year) and whether this is feasible in practice.
  4. Look at how you could reduce the increased cost going forward.
    One option is to include overtime, commission and other variable payments (which form part of normal pay) in the calculation of holiday pay, calculate the increased cost of this and take this into account when looking at salary reviews and the structure of commission and bonus schemes etc.

Next Steps

We have advised a number of employers on the best strategy for their business to deal with holiday pay issues, including assisting them to budget for and mitigate against the potential costs.

If you’d like to discuss any HR issue, whether it’s a steer on calculating holiday pay or any other work force issues, please contact:

Sarah Tahamtani - 0113 336 3314 / sarah.tahamtani@clarionsolicitors.com