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Commission and Holiday Pay

On 29 July, I blogged in relation to an employment judge’s decision that an employee was entitled to have payments relating to voluntary overtime taken into account when calculating his holiday pay in respect of the minimum 4 weeks' annual leave required by the Working Time Directive (“the Directive”).

The Working Time Regulations (“the Regulations”), which give effect to the Directive in the UK, entitle employees to a minimum of 5.6 weeks’ paid annual leave. They state that statutory holiday pay is to be calculated using provisions which have been interpreted to exclude overtime, unless it is guaranteed, and overtime premia.  The same provisions stipulate that in the case of employees who work normal working hours, it is not compulsory to reflect commission in their holiday pay.

Now, in a case before the European Court, Lock v British Gas Trading Ltd, the Advocate General has given an Opinion that the Directive requires regular commission to be taken into account when calculating the correct remuneration for paid annual leave. As is the procedure in the European Court, the Opinion is to be considered by the judges presiding over the case in reaching their decision – and more often than not, judgments are consistent with the Advocate General’s Opinion.

If the European Court does decide that commission should be reflected in holiday pay, public sector employers in the UK will be required to recognise the principle, as they must act in accordance with European directives.  As for private sector employers, unless and until (i) the Regulations are amended consistent with such a judgment or (ii) there is a binding decision from a higher tribunal or court that the Regulations are to be interpreted to give effect to this aspect of the Directive, it will be up to employment judges in each individual tribunal claim to decide how to interpret the law.

A decision by the European Court in this case to follow the Opinion of the Advocate General is bound to make it more likely that (a) the Regulations will be amended to expressly require elements of remuneration such as commission (and overtime payments) to be reflected in holiday pay; and (b) in the meantime, judges in the UK will interpret the Regulations on the basis that such payments must be reflected in the first 4 weeks’ holiday pay in each holiday year.

For suggestions regarding the approach that employers might take to address the current uncertainty surrounding the calculation of holiday pay, see my 29 July blog.  In addition, note that although claims by employees for a shortfall in holiday pay must normally be brought within 3 months of the date the payment was due, consecutive underpayments in respect of holiday pay are linked and claims can result in compensation covering amounts owing over many years.  Employers should consider taking advice on strategies for breaking possible chains of underpayments in order to minimise their exposure to liability.

For advice relating to the above issues, please contact me (T: 01952 211010; E: john.merry@lblaw.co.uk) or Will Morse (T: 01432 377152; E: will.morse@lblaw.co.uk).