Holiday pay costs for employers expected to increase

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Summary: The European Court of Justice’s landmark decision in Lock v. British Gas Trading Ltd raises the prospect of increasing employers’ holiday pay costs. Employers should start reviewing their statutory holiday pay arrangements for staff who are entitled to variable pay such as commission, bonuses, overtime and allowances, to assess whether statutory holiday pay should include sums in respect of those elements of remuneration.

Statutory holiday pay includes commission

The European Court of Justice’s (ECJ) landmark decision in Lock v. British Gas Trading Ltd raises the prospect of increasing employers’ holiday pay costs. Employers should start reviewing their statutory holiday pay arrangements for staff who are entitled to variable pay such as commission, bonuses, overtime and allowances, to assess whether statutory holiday pay should include sums in respect of those elements of remuneration.

ECJ decides employee was entitled to a commission-based element in his holiday pay

Mr Lock, a salesman, was paid basic salary plus variable commission based on the number of sales he achieved. Commission made up 60% of his overall pay. He claimed that his statutory holiday pay should include a sum in respect of commission to compensate him for not generating sales whilst he took holiday. The ECJ agreed. It said:

  • The amount of an employee’s holiday pay should correspond to an employee’s normal pay.
  • Where an employee’s pay is composed of different elements such as overtime, commission or allowances, an employee’s normal pay includes those elements which are intrinsically linked to the performance of the employee’s duties. In Mr Lock’s case, his commission was directly linked to his sales role, and he was therefore entitled to an additional uplift to his holiday pay to compensate him for commission he couldn’t earn whilst on holiday.
  • It is up to the employment tribunal to calculate that commission-based uplift over a representative reference period.

Implications for employers

Employers should now start reviewing the arrangements for staff who are entitled to variable pay such as commission, bonus, overtime payments and allowances, and decide the extent to which such payments are intrinsically linked to the employees’ job roles. It may be possible to revise variable pay arrangements going forward to make the impact of the Lock case cost neutral.

Employers should bear in mind that staff may be able to rely on the ECJ’s decision in Lock to claim not just for future increased holiday pay, but also for historic underpayment of holiday pay going potentially as far back as 1998.

Heightened awareness of this issue is due to continue for some time yet, with the EAT due to hear two cases – Neal v. Freightliner Ltd. and Fulton v. Bear Scotland Ltd – at the end of July 2014, on whether holiday pay should include overtime payments. It is hoped that these cases will shed further light on how employers should calculate holiday pay to take account of variable remuneration.

 

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