Firms Facing Risk from Backdated Holiday Pay

Britain’s position within the EU has been intensely debated of late. The European Court of Justice (ECJ) decision in Lock v British Gas Trading Ltd however may cause concerns beyond the staunch Euro-sceptics.

Pre 1998 there was no statutory entitlement to paid holidays for workers in the UK. Plenty of people had them because they are conducive to a good working relationship but they were not mandatory. Cue the Working Time Regulations in October 1998 which implemented the Working Time Directive; a Directive and therefore a mandatory piece of EU legislation for Member States to adopt.

When adopting the Directive, the UK Regulation takes the minimum 20 day period stipulated (for a full time, 5 day-a week worker) and adds a further 8 days (usually the statutory bank holidays, but not necessarily) In short, a full time UK worker receives 28 days of paid leave per year.

Until now, many UK businesses have calculated the value of this 28 day period based on “basic pay” i.e. flat, contractual rates of pay, not including commissions, bonuses or the like. There has been nothing wrong with this and certainly no suggestion of it being unlawful…..until now.

Mr Lock worked for British Gas on a part salary, part commission basis. As a result, about 60% of his monthly remuneration was made up of commission. When British Gas calculated his paid holiday entitlement however, they did not factor in any commission element as Mr Lock was not making sales whilst on holiday and thus not generating commission for them.

The ECJ considered the matter and found that when an employee’s commission was “intrinsically linked” to the performance of his or her role, then it should be included in a holiday pay calculation. Essentially, because Mr Lock’s role was sales and his sales generated commissions, his commission was bound into pretty much everything he did at work; it was intrinsic.

The ECJ were also swayed by the fact that the significant drop off in income was also causing Mr Lock not to want to take holidays and therefore interfering with the very purpose of having mandatory leave in the first place- relaxation and leisure.

What does this ruling mean? If your employees roles are “intrinsically” linked to a commission/bonus payment structure then you should be factoring this in when calculating holiday pay. The ECJ did not go as far as to say how this must be done and have passed this back to the UK courts to decide. Presumably however, the Courts will adopt some sort of “average commission” type calculation, perhaps looking back over the previous 12 months at commission payments received and applying an average payment.

The affect of this ruling could mean a back dated payroll bill of millions to SME’s and larger corporations. There has been a call for the UK Government to act quickly to address the issue and prevent this from happening. Employers will argue that UK legislation is generous to begin with, adding an extra 8 days to the minimum period and that in any event, it cannot be fair that their apparent compliance with UK legislation should now be penalised in retrospect.

For further information please contact David Lewis on 01633 244233 or email lewisd@hevans.com