Business Finance: Marie Allen on how a European ruling means changes in holiday pay

Marie Allen of Gotelee Solicitors.

Marie Allen of Gotelee Solicitors. - Credit: Archant

In a significant (and worrying) case for employers, the European Court of Justice has determined that pay for a worker’s statutory holiday entitlement must include commission where this forms part of the normal pay arrangements.

In Lock v British Gas Trading Ltd, Mr Lock was a salesman who received a basic salary plus commission on sales achieved. Mr Lock’s employer only paid basic salary for periods of annual leave which meant that Mr Lock was out of pocket if he took holiday and was deterred from doing so. He brought a claim in the Employment Tribunal.

The Employment Tribunal made a reference to the European Court of Justice to ask if the Working Time Directive, which our domestic legislation implements, required the calculation of holiday pay to take into account commission payments. The European Court has said yes, but has left it to our own courts and tribunals to determine how the calculation should operate in practice.

The case confirms that where a worker’s pay consists of a basic salary and variable elements, which are directly linked to work, then holiday pay should not be based on basic salary alone. It should be comparable to the worker’s normal earnings, so averaging out commission payments over a reasonable period would be a sensible approach.

This case follows hot on the heels of that of Neal v Freightliner, in which an Employment Tribunal decided that holiday pay should take into account overtime pay, irrespective of whether the overtime is compulsory or voluntary.

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The company has appealed this decision and so we do not yet have a binding decision on this point. Nevertheless, we consider that, in light of the Lock case and other similar cases on the point, it is clear what line the courts and tribunals are taking.

So whilst employers are not currently obliged to include overtime payments in the calculation of statutory holiday pay, there is an ever-increasing risk that, unless employers change this practice, in the event of a challenge they could find themselves paying back holiday stretching over a number of years.

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It should be noted that the decisions only apply to pay for statutory holiday and so payment for any holiday in excess of the statutory minimum would not be affected by these decisions.

: : Marie Allen is an employment solicitor at Gotelee Solicitors.

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