Employers will need a break if law changes

Some UK employees considering their holiday plans could have a little more spending money. Picture: PA

Alongside Rio, Marseille, and Liverpool, Glasgow was recently named one of the world’s top tourist destinations for 2014 by experts at Rough Guides, one of the world’s leading travel publishers.

Some UK employees considering their holiday plans (whether for Glasgow, or further afield) could have a little more spending money to play with, under a European ruling on holiday pay expected in the next few weeks, which could leave organisations facing much higher holiday pay costs – and possibly give rise to claims dating back over 15 years.

The case (Lock v British Gas Trading Limited) originated in the UK. Mr Lock, a salesman from Leicestershire, brought a tribunal claim against British Gas, arguing that his holiday pay should include not only his salary, but also a sum equivalent to lost sales commissions. Given that UK holiday rights under the Working Time Regulations derive from European legislation and Mr Lock was arguing the UK Regulations did not properly implement European law, his case was referred to Europe for a ruling.

The Court of Justice of the European Union is due to hear the case later this month or in February, but, in the meantime, the Advocate General has given an official opinion on the case. His view is that holiday pay should include commission payments. He commented that it was for national courts to determine how that amount should be calculated but suggested that a look-back period could be used, for example, on the basis of the commission received over the previous 12 months.

In most cases, the court will follow the Advocate General’s recommendation, although it is not obliged to do so. If the court agrees, and finds in favour of Mr Lock, this would give rise to a fundamental change in the calculation of holiday pay for employees receiving regular commission payments, and potentially other pay allowances. Employers would no longer be able to exclude such payments from holiday pay, leading to much higher calculations in some cases.

This case comes hard on the heels of a number of similar cases in which the UK courts have found that holiday pay should include components of remuneration which are intrinsically linked to the worker’s role.

This includes a tribunal case in which it was decided that holiday pay should include overtime payments (even where the overtime was not guaranteed), and a Supreme Court case which found that “flying pay” allowances for BA airline pilots should be included.

The theory behind these cases is that employees should not be dissuaded from taking their holiday. That is to say that employers would have to include commission payments when calculating the holiday pay for the first four weeks of holiday, but could choose to pay basic salary only in respect of other holidays. Therefore, in order to ensure that employees do in fact take their holiday, what they receive in holiday pay should include everything they would have received had they been working, not just their basic salary.

If the Court of Justice of the European Union decides that regular commission must be included in holiday pay calculations, the impact is likely to be limited to the four weeks’ minimum annual holiday required under European legislation (rather than the full 28 day entitlement provided under UK law). However, claims for underpayment of holiday pay could go as far back as 1998, when the UK Working Time Regulations were introduced.

The decision has a potentially huge impact on UK employers in respect of past and future holiday periods. As well as the additional financial costs involved, there would be an administrative burden on employers who may be required to reassess the correct commission figures to include in holiday pay each time holiday is requested.

Organisations with large commission-paid sales forces, who face potential multiple “class action” type claims, are already considering legal steps to limit any exposure. However, for certain smaller employers, the decision could be both unexpected and significant. It may end up being business owners who feel like they are in need of a holiday.

• Katie Russell is an employment law associate with Shepherd and Wedderburn www.shepwedd.co.uk