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We have all heard about the Lock case and the decision of the European Court of Justice (ECJ) regarding the calculation of holiday pay.

Under our Working Time Regulations (WTR), workers receive a week’s pay for each week of leave. The week’s pay calculations are complicated, but it seems that employees only receive basic pay for holiday if they work normal hours – overtime and commission are excluded.

Mr Lock was paid a basic salary and regular commission payments. When he took holiday, he was paid his basic salary and commission earned on previous sales, paid in arrears.

However, he suffered a financial disadvantage after the holiday as a result of not having earned commission during the holiday.

He brought a claim – arguing that his holiday pay should include commission payments.

The ECJ decided where a worker’s pay includes commission, commission payments should be taken into account when calculating holiday pay.

If commission payments are not taken into account, the worker will be disadvantaged financially by taking holiday – they will not generate commission during annual leave – and this may deter a worker from taking annual leave.

The case is being referred back to the Tribunal and hearings are expected in October 2014 and March 2015.

What are the implications of this decision?

Public sector workers can probably rely on ECJ’s decision now.

For those in the private sector, the outcome of this case could have far reaching implications.

Depending on the outcome of the Lock case, employers may need to take account of commission payments when calculating holiday pay.

The same principle may apply when calculating holiday pay for workers who receive overtime payments, certain allowances and possibly bonuses.

There have been other cases regarding whether holiday pay should include other types of payment, such as overtime, and a decision is awaited from the Employment Appeal Tribunal.

If commission and similar payments which are intrinsically linked to the performance of tasks under the contract are to be included in holiday pay calculations, how should holiday pay be calculated?

It is likely that we would need to look at commission earned over a representative reference period to work out a week’s pay for holiday pay purposes.

What is the potential historical liability for underpayments?

Employers are faced with the possibility of back pay claims by workers stretching back many years.

Claims based on a series of unlawful deductions must generally be brought within three months of the last deduction.

What should you do while you wait for the appeal decisions and the outcome of the Lock case?

For private sector employers, you have three main options.

Option 1 – settle back pay claims now

Advantages  – no claims, no ongoing liability and your employees will be happy!

Disadvantages – cost of settling, and the courts and tribunals may decide that there is no obligation to include commission etc in the calculation of holiday pay in the private sector, so you will have paid for nothing.

Option 2 – pay holiday pay including commission etc going forward.

Advantages – good for morale, and workers will be out of time to claim for historical payments in the tribunal after 3 months of receiving “correct” payments.

Disadvantage  – employees may become suspicious, which could lead to employees taking advice and lodging claims for historical payments.

Option 3 carry on relying on the WTR and wait and see what the courts and tribunals decide.

Advantage – immediate cash flow is unaffected.

Disadvantage – may have to pay later including for historical claims.

If you are unsure of the best course of action, contact us.

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