Kate Hodgkiss, Partner in the Edinburgh office, comments: The European Court of Justice (ECJ) has today handed down judgment in a case which could mean that employers face huge liabilities for claims for holiday pay. The issue arises because of an apparent conflict between UK and European law as to how holiday pay should be calculated and in particular whether elements of remuneration such as overtime and commission must be included.
The Working Time Directive (Directive) entitles workers to 4 weeks’ leave but does not specify how pay should be calculated. The Directive is implemented in the UK by the Working Time Regulations 1998 (WTR). Under the WTR workers are entitled to 5.6 weeks’ leave and must be paid at the rate of a week’s pay for a week’s leave. The Employment Rights Act 1996 (ERA) sets out how to calculate a week’s pay; the calculation depends on a number of factors including whether or not a worker has normal working hours. The effect of the week’s pay provisions is that many common elements of remuneration, such as overtime, commission and bonus are excluded from statutory holiday pay.
However, in cases interpreting the WTD the ECJ has stressed the need for normal remuneration to be maintained during the period of annual leave. In a 2011 case (Williams v British Airways) the ECJ ruled that (1) workers on annual leave should receive their normal remuneration and (2) normal remuneration entitled a worker to any payment which is intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment . The ECJ held that it is then left to the national court to assess the intrinsic link between the various components making up the total remuneration of the worker and the performance of the task he is required to carry out under his contract of employment.
Following Williams it has been argued in several claims in the UK tribunals that the WTR and ERA provisions conflict with EU law and that certain payments, such as commission or overtime payments, should properly be considered normal remuneration and be included in holiday pay calculations.
The ECJ today handed down judgment in a reference in one such case, Lock v British Gas Trading and others and has restated the principle that holiday pay must correspond to normal remuneration. Lock receives a basic salary plus commission on the sales that he achieves. The sales commission is paid several weeks or months after a sale is concluded and makes up approximately 60% of his total remuneration. While on annual leave, he was paid his basic salary plus the commission from previous sales that fell due during the period. However, Lock then suffered a reduced income in the months following his return to work because he had not secured sales, and therefore did not generate commission, while he was on annual leave. Lock brought a claim for unpaid holiday pay and the tribunal asked the ECJ whether commission should be included in holiday pay.
The ECJ said that commission must be included as otherwise the financial disadvantage suffered might deter workers paid on a commission basis from taking leave. Commission will, of course, vary over time; the ECJ said that it was up to the national courts to decide how to calculate how much commission should be paid during any period of annual leave on the basis of a representative reference period.
This is not good news for UK employers, but is unsurprising given the ECJ’s earlier ruling in Williams. The recent trend in case law strongly suggests that UK employers may have to include in holiday pay calculations any remuneration intrinsically linked to the performance of the contract, including overtime and commission payments – at least so far as the 4 weeks’ WTD holiday is concerned. Most employers will, at the moment, be calculating holiday pay on the basis of basic remuneration only. These employers may therefore face significant liabilities for underpaid holiday in the event of claims. The key question is how these ECJ decisions are applied in a series of appeals due to come before the EAT this summer. The EAT is due to hear an appeal in the joined cases of Neal v Freightliner Limited and Fulton v Bear Scotland on 30 and 31 July. At least two more cases are now on appeal to the EAT and may also be joined with Neal. All these claims relate to overtime. If the EAT rules that the UK law can be read to give effect to the ECJ decisions, while individual underpayments may be relatively small, they may accumulate to a significant liability when multiplied across a large workforce. Failure to make the correct holiday payment is an unauthorised deduction from wages and claims may be brought at any time within 3 months of the last in a series of deductions. This means that workers can potentially bring claims in respect of holiday pay going back many years (potentially back to 1998 if the underpayment has gone on that long although there are arguments for a limitation of 6 years), provided they bring the claim within 3 months of the last incorrect holiday payment. Alternatively, the EAT may decide that UK law is simply incompatible with the WTD in which case private sector workers would have claims against the Government rather than their employer, but public sector workers would be able to rely directly on the WTD to bring tribunal claims.
Employers may have some options to reduce their potential exposure to claims, or limit their liability in the future, but these will depend on the profile of the workforce, the elements of remuneration and the nature of the employer’s business. For the majority, the most sensible option may be to wait and see how the EAT deals with the appeals. Employers will face a tense wait for the EAT’s decision.