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Are Employers Facing A Holiday Pay Time Bomb?

Are Employers Facing A Holiday Pay Time Bomb?

Should pay relating to holidays taken under the Working Time Regulations (WTR) include commission payments which the worker would normally expect when working? The long awaited decision of the European Court in Lock v British Gas firmly answers this question in the affirmative.  Holiday pay must include commission earned under contractual arrangements.

The decision of the European Court builds upon previous cases and principles. These decisions emphasise that paid annual leave under European law is a “particularly important social right” introduced for the protection of the health and safety of workers and that arrangements for leave should not prevent or deter workers from taking their entitlement.

Many employers traditionally paid basic pay only during holidays. This in turn has led to numerous challenges by workers and their trade unions regarding the variable elements of pay which are now commonplace.

The Lock case follows a previous decision of the European Court concerning allowances. In Williams v British Airways 2,750 staff claimed they had received less holiday pay than they should have. Pilots received three types of pay when working. These were fixed basic pay, a flying allowance which is an hourly enhancement for flying time and time away pay in consideration for expenses.  BA calculated holiday pay on basic pay only, whereas the pilots claimed that this should include the flying allowance and time away elements. The European Court set out a basic but fundamental principle namely that during periods of statutory annual leave, the worker should be put in a comparable position to periods of working. In other words, holiday pay should correspond to normal pay. The Court ruled that holiday pay should include “all the components intrinsically linked to the performance of tasks”. On that basis, the flying allowance should have been included, but not time away pay which was reimbursement for expenses.

The Williams case has implications for all employers who pay allowances based upon for example, work location or the type of work being conducted. This could affect many sectors such as construction, where site allowances may be paid and oil and gas, where offshore allowances are also frequently paid for each night spent working on an offshore installation. There is a misconception in the oil and gas sector following upon the case of Russell v Transocean that the industry is fully compliant with the WTR. However, the Russell case dealt with the issue of time off only - whether the employer can insist that leave is taken during a field break or when the employee is not scheduled to work offshore.  The case had nothing to do with pay arrangements.

It is perhaps not surprising therefore that in Lock, the European Court rules that holiday pay should also include commission. Under Mr Lock’s contract, he received commission on sales which made up approximately 60% of his remuneration. He actually received the commission earned several weeks or months after sales were concluded. When Mr Lock went on holiday over Christmas and New Year, his pay included base salary plus commission from previous sales that fell during earlier periods. However, he incurred a reduced income in the following months because he had not generated any sales and therefore commission, when he was on leave.

Whilst Mr Lock did receive commission payments when on leave, the Court was clear that the practice adopted could deter workers from taking their entitlement, as they would suffer a reduction in income upon return.  As such, the practice was unlawful and Mr Lock should have suffered no reduction in income based upon his average earnings which should include commission, even though he was not generating any sales when on leave. The Court gave an indication as to how far they may be prepared to go when it comes to the variable elements of pay. The Court referred to there being “an intrinsic link between the commission received each month by Mr Lock and the performance of the tasks he is required to carry out under his contract of employment.”

Is that the end of the matter?  Unfortunately for employers, no. This is now likely to be a major ground of potential litigation and claims in the future. What about overtime payments? There are combined cases proceeding from both England and Scotland to the Employment Appeal Tribunal at the end of July on that issue. The arguments here are likely to centre around the voluntary nature of overtime. However, the decision and reasoning in Lock is likely to be helpful to the employees in the overtime cases. Can similar arguments be made about bonuses?  A further issue is how far back can such claims be made? There are arguments that an incorrect holiday pay claim can go back several years and potentially, on a worst case scenario for employers to when the WTR was first introduced in 1998.  That is a potential ticking time bomb which trade unions are becoming very aware of. These are issues which affect all employers in all sectors and could result in many claims going back over several years. As a minimum all employers should review their pay and leave arrangements to assess potential liabilities and consider what steps could be taken to minimise those going forward.

Sean Saluja
Partner

LChalmers