Holiday pay must include commission, ECJ rules

by DLA Piper
Contact

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.

Implications

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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© DLA Piper | Attorney Advertising

Written by:

DLA Piper
Contact
more
less

DLA Piper on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.