Holiday pay commission change will be HR nightmare

Things have moved apace since the European Court of Justice (ECJ) ruling. Picture: Complimentary

One employer recently described it to me as “a second nightmare on the HR horizon”. CBI Scotland have said it could put companies out of business. After the enormous challenges of equal pay legislation, the new monster is holiday pay.

Things have moved apace since May, when the European Court of Justice (ECJ) ruled in the case of Lock v British Gas Trading Ltd. Lock was a sales consultant and commission made up approximately 60 per cent of his total remuneration. He brought a case based on the premise that his holiday pay was calculated on his basic salary, not including commission, and that he suffered financial disadvantage as a result. His legal team argued Lock, and others like him, would be discouraged from taking up their full holiday entitlement if their income would be so much lower during that holiday.

The UK Employment Tribunal had referred the case to the ECJ, which found in favour of Lock – opening the door for thousands of workers whose total pay was heavily reliant on commission, including sectors like financial services, insurance and sales.

As the Working Time Regulations (1998) were originally implemented to bring the UK in line with European law, it appeared the UK government would have to amend the regulations to bring them in line with the new judgment, or rely on the courts and tribunals to “interpret” the issue on a case-by-case issue.

However, things got more complicated when further cases came to the UK Employment Tribunal, adding overtime into the mix. If commission was taken into account when it came to calculating holiday pay, what about those who carried out regular overtime? And what about travel allowances or performance bonuses?

They argued that if commission was in, overtime had to be in too – and the Employment Tribunal appeared to follow that thinking by ruling in favour of the workers, including the case of Fulton v BEAR Scotland, the roads maintenance organisation.

The employers appealed and everyone is now awaiting the decision of the Employment Appeals Tribunal which was reserved in August. I think UK legislation will have to be changed, but even that wouldn’t be the end of the story.

This is because claims for additional holiday pay based on overtime and commission could in theory be backdated to 1998, when the UK Working Time Regulations were introduced.

One school of thought is that employers might argue they aren’t liable for backdated payments as it is a failure on the part of the UK government to comply with European law. If the courts say it is impossible to reconcile UK regulations with the ECJ decision, employers could suggest the government picks up the tab. It is difficult to see the Government accepting this.

I think there will have to be some kind of move towards legislative changes, leaving the way forward for potentially hundreds of thousands of employees who believe they can submit a claim for backdated holiday pay based on commission or overtime.

The big issue is how many years backdated payments can be claimed. Many think the civil limits of five years in Scotland or six years in England and Wales may be followed, but it is still unclear.

Some trade unions are already preparing “class action”-style cases on behalf of large numbers of employees. In that sense, the cat is out of the bag and employers have to come up with tactics to address the issue.

This might mean agreeing a new method of agreeing holiday pay, while making an agreed one-off payment, to cover what has gone before.

Large employers are wise to the implications; some are at advance stages of negotiations with unions or employee representative organisations and are making provision for the likely ruling in favour of employees. Very small firms are likely to be able to come to some agreement with employees, but firms with between 20 and 200 staff might find themselves in a squeeze. They might not have the resources to make large payments, but not doing so could leave them with very unhappy employees.

Many are awaiting the next judgment anxiously – and in my view, the conclusion that it is “another HR nightmare” is very hard to resist.

• Robert Holland is an employment law partner with Balfour+Manson www.balfour-manson.co.uk