Holiday pay a hot topic for employers

Time off for holidays can be a ticking time bomb for companies. Picture: Getty

As summer holiday season approaches, employers may be thinking what holiday cover do I need and what can I afford after paying staff holiday pay?

Before embarking on a massive summer recruitment campaign, you may wish to cast your mind back to last summer, when the press reported that the “never knowingly undersold” John Lewis Partnership had underpaid staff holiday pay to the tune of £40 million over a seven-year period.

The error arose because John Lewis had been basing its holiday pay calculations on contracted weekly hours for staff only and not overtime as required under the Working Time Regulations 1998 (WTR).

As there have been no further reports of employer “payouts” of this magnitude, you could be forgiven for thinking that it was an isolated payroll error which John Lewis duly rectified.

Not so, and a recent European case on commission pay (Lock v British Gas) has added to the dilemma of what should be included when calculating holiday pay.

The case of Neal v Freightliner (which triggered the John Lewis payouts) confirmed that overtime payments should be included in holiday pay.

The European Court in Lock v British Gas has gone a step further, confirming that holiday pay must include commission earned under contractual arrangements.

Mr Neal had a contract of employment for 35 hours per week which also stated “that he may be required to work overtime when necessary”.

Mr Neal regularly worked overtime but his employer, like many employers, only calculated his holiday pay by reference to his basic 35 hours he was contracted to do.

The Employment Tribunal confirmed that the employer should have recalculated Mr Neal’s pay, in accordance with all time worked and not just based on what he was contracted to work, in line with the WTR.

The Lock case follows a similar line of argument to Neal, but dealt with the issue of “commission” which made up a regular part of the employee’s pay.

Under Mr Lock’s contract, he received commission on sales which made up approximately 60 per cent of his remuneration. He actually received the commission earned several weeks or months after sales were concluded.

When Mr Lock went on holiday, his pay included base salary plus commission from previous sales that fell during earlier periods. However, he incurred a reduced income in the following months because he had not generated any sales and therefore commission, when he was on leave.

Whilst Mr Lock did receive commission payments when on leave, the court was clear that the practice adopted could deter workers from taking their entitlement, as they would suffer a reduction in income upon return.

As such, the practice was unlawful and Mr Lock should have suffered no reduction in income based upon his average earnings which should include commission, even though he was not generating any sales when on leave.

These cases are a potential ticking time bomb for employers in all sectors and could result in many claims going back over several years. A further issue is how far back can such claims be made? There are arguments that an incorrect holiday pay claim can go back several years and potentially, on a worst-case scenario for employers, to when the WTR was first introduced in 1998.

So, before you pack your suitcase and head for the beach, you might like to have a look at your employees’ leave arrangements, as they could be in line for a sizzling summer settlement!

• Mandy Laurie is a Partner with Burness Paull LLP