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Are you saving up to pay for your employees’ holidays?
Back in January I mentioned the case of Lock Vs British Gas Trading concerning the issue of holiday pay for an employee whose remuneration included an amount of commission. The opinion of the Advocate General of the Court of Justice of the European Union (CJEU) was that his pay should include an amount to reflect his average income including the commission. This was because that when Lock was away on holiday, he could not generate any sales and so his pay was reduced when he returned from leave. We have since been waiting for the CJEU’s decision which has now been announced.

In its judgment, the court has confirmed the basic principle that workers must be put in a comparable position during annual leave when compared to a period when they are working. So, they must not lose out by taking leave, as Lock did. The court emphasised that any other outcome might deter the worker from taking annual leave.

The calculation of holiday pay is relevant to all employers and potentially costly. Recent case law has indicated a move towards holiday pay needing to include wider payments and this decision is confirmation of that trend. However, this judgment does not provide all the answers.

The UK courts will still need to consider how the decision will be applied in this case, and how our national law can be read to be compatible with the ruling. A change to UK law may be required. The UK’s Working Time Regulations 1998 lay down quite clearly how pay during annual leave should be calculated. The default position is to pay what employees are due under their employment contracts during their normal working hours. This approach changes if there can be different working hours under the employment contract or if the pay varies according to the amount of work done. In those circumstances a 12-week calculation period is used – not a 12 month period as suggested by the Advocate General.

In previous judgments, the UK Court of Appeal has decided that commission is not pay which varies according to the amount of work done, but it varies according to the success of the work. However, the 12-week averaging period does not solve the problem identified by the European Court in the Lock case. There will be arguments over the coming months in tribunals about whether the wording of the UK regulations can be tweaked to work with this European judgment and this is likely to be difficult.

There is no definitive answer as to what this decision means for employers. Approaches to commission and other incentive payments vary hugely from employer to employer. What impact annual leave has on each employee’s ability to earn will differ from role to role, and will depend on what employees are selling and how they have been incentivised. Leave may even have a different impact depending on when it is taken and when the peak/trough sales periods are.

Employers need to consider the potential implications of this judgment and take steps to identify and quantify risk for employees with variable pay elements, such as commission or overtime. If you are in this position you should ask yourself what claims you could face from whom and what they are worth. Some legal advisors are suggesting making changes now so any possible claim that there has been a series of linked illegal deductions of wages going back 6 years is broken. This would limit possible claims to 3 months.

Employers should also look at commission schemes and consider whether they can be amended or appropriately redesigned. If possible, employers may wish to consider reducing the headline rate of commission to offset any additional holiday pay which may be due. Ensuring that commission is paid gradually over an extended period might also counterbalance some of the risk from this difficult judgment.

Contact Cherington HR if you are likely to be affected by this ruling and need advice on assessing its effect on your business.
Posted on 19 Nov 2016

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