Employers beware: recent case law could result in fundamental changes to the definition of ‘holiday pay’


How much should you pay your employees when they take annual leave? Until recently this has been a relatively straightforward question, with employers paying a fixed amount based upon annual salary. However, this question has recently become a more complicated one for employers.

In a recent EU ruling, Lock v British Gas Trading and others Case C-539/12, the European Court of Justice (ECJ) ruled that a worker receiving monthly commission payments should be credited with a notional amount reflecting his commission pay as part of his holiday entitlement. This is to ensure that the employee has not suffered detriment or is ‘worse off’ financially by virtue of having taken annual leave. This effectively alters the definition of ‘holiday pay’ to include other elements which have not been included until now.

The definition of holiday pay is derived from the Working Time Regulations 1998, which, although not explicitly defined, have always been accepted to be based purely upon annual salary. The recent case law, including other elements of pay, has now made it clear that this definition can no longer be relied upon. This is especially true when taken with the ECJ’s earlier decision in Williams and others v British Airways plc Case C-155/10 ECJ, which ruled that pilots were entitled to receive various allowances included in their holiday pay.

The recent ruling does not automatically alter the definition, or signify that the law has changed, what it does mean is that similar cases brought to tribunal by employees will stand a far greater prospect of success on the part of the claimants. It is also clear, that a redraft of the regulations is now overdue.

So what next?
The ruling on commission payments is likely to bring about a raft of cases from employees claiming commission back pay. In addition, experts now forecast that a similar principle will soon apply to overtime payments. In July 2014 two similar cases were brought to the courts. These two cases are significant because, although the judgement will not be published for some time, when it is, it is likely that any redrafting of the Working Time Regulations will also include overtime payments as well.

What are the financial implications?
Employers will have to make provision for an increase in their annual salary budgets caused by the increased cost of holiday pay. The potential reduction in payment of commission and overtime from employers attempting to control their costs could have a detrimental impact on employees.
Probably most significant of all is the possibility of substantial back-pay claims, where affected employees could claim for underpayment of holiday pay spanning back as far as the introduction of the regulations in 1998. The potential financial impact of this could be huge for some employers.

What can employers do to prepare for potential changes?
Any employer currently considering introducing a commission structure would be advised to build in an averaging provision that allows for periods of leave. Similarly, employees currently receiving regular overtime are likely to be entitled to have their holiday averaged out over a certain period to reflect their ‘actual’ earnings rather than just those based on annual salary.

For more information, please contact Karen Foot.