Holiday pay, time to worry?

As it stands employers must, according to the European Court of Justice (ECJ), include a calculation for commission when calculating holiday pay. This is contrary to the present UK legislation and leaves employers and the Employment Tribunals in a quandary. This article looks at what employers can do and how these seemingly contradictory positions may play out.

After the ECJ’s decision on 22 May 2014, hearings were held in the Employment Appeal Tribunal (EAT) on the 30 July and 1 August 2014 to consider issues concerning this point.

Under certain conditions a UK Court or Tribunal can interpret, but not re-write, domestic legislation so as to properly give effect to the European legislation. The question in this instance is whether the EAT can go far enough do this or if the domestic legislation is wholly incompatible. If the EAT finds that it can read the domestic legislation in the light intended by the ECJ it seems almost certain that employers will have to start paying employees holiday pay based on their ‘normal’ remuneration, i.e. remuneration which may include commission, overtime, and bonuses. It is a potential windfall for employees and major headache for employers nationally. If the EAT decides it cannot interpret the legislation this way then legislative changes will likely be necessary.

Whilst the ECJ seems to think this would be a simple undertaking for employers a number of questions remain to be answered by the EAT in light of the present UK legislation such as:

  • Over what period must normal pay be calculated
    For most purposes it would be 12 weeks under the existing UK legislation. For employees in travel, which have peaks and troughs in bookings, it means employees will be better off taking holiday after busy periods and no doubt leading to some game playing. But it also means those who are paid a bonus on an annual basis may benefit to a lesser extent. This leads many to think the reference period should actually be 12 months in order to comply with the ECJ’s decision;
  • Just what should be included
    Almost certainly commission and overtime. Although possibly performance bonuses, discretionary and non-discretionary bonuses,
  • Can claims be back dated
    It seems likely that employees would be able to make claims for the previous 6 years of ‘underpayment’. At best it may just be for the previous year’s leave and at worst claims could go back to 1998;
  • Does all annual leave have to be calculated in this way
    Of a worker’s 5.6 weeks annual leave entitlement only 4 weeks is by virtue of European law. So the question arises whether or not the ECJ’s decision applies to the whole 5.6 weeks, and if it does, not to which holiday it relates. An Employment Tribunal decision indicates it would be for employee to elect which 4 week holiday they wanted to take in accordance with European Law. However, the Employment Tribunal’s decision is not binding so the question remains unclear.

What do now?

There are in reality two options:

1. Await the EAT’s decision

As briefly indicated above there are some significant questions over just how the ECJ’s decision will be enacted, if at all. Employers who already factor in commission or overtime also risk calculating pay incorrectly, given that we do not know precisely which sums should be included and over what period.

It is also possible that the EAT concludes that it simply cannot properly read into the UK legislation what the ECJ says it should, meaning it is left for parliament to alter the legislation and the theoretical prospect that employees could make claims against the state for backdated holiday pay.

2. Start factoring in commission, overtime, and bonuses

If holiday pay is paid correctly in line with the ECJ’s intention then what is essentially an unlawful series of deductions ends. The employee only has 3 months from the date of an unlawful deduction to bring a claim. The potential windfall is therefore that grateful employees miss the fact that they could be claiming back dated holiday pay over 6 years and the 3 month limitation period rolls by.

However, this has to be weighed against the financial penalty and the difficulties of knowing precisely how to calculate holiday pay in the absence of EAT authority. It also risks employees being ‘tipped off’ and claiming back dated pay in any event.

Just what to do will depend on each employers individual circumstances. It seems certain in light of the ECJ’s decision that at some point in the future holiday pay must factor in commission, overtime, and bonuses but that could be contingent on parliament amending the existing legislation which will take time.

Although it would be worthwhile doing some analysis now as to what this could mean for your company’s particular circumstances and using that information to help inform the decision. It would also be sensible to start to consider what changes might be beneficial to the structure of pay in the future either as a result of the imminent EAT decision or as a result of any legislative changes.

Contact Nafisha at on 0113 242 4444 should you wish to discuss these or any other employment issues.

Please note this information is for general guidance only and is not intended to be a substitute for specific legal advice.

mb LAW
Studio 3, The Quays,
Concordia Street,
Leeds LS1 4ES

Practice areas