UK: Employers should review holiday pay following ECJ ruling

Employers should review their approach to calculating holiday pay for employees and workers who have fixed normal hours but receive variable payments such as commission. An ECJ ruling has held unlawful UK provisions which permit employers to pay such workers statutory holiday pay at the rate of basic salary and ignore commission that the worker would normally generate when working. Similar issues may arise where workers receive voluntary overtime pay or bonuses. However, it may be possible to limit the scope for historic claims by changing policy now.

The ECJ has ruled that workers must be paid for their 4 week statutory minimum holiday entitlement at their normal pay rate, to include all elements of pay which are "intrinsically linked" to the performance of the tasks which the worker is required to carry out under their contract. This includes commission paid for sales a worker would have generated had they not been on holiday (even where payable after, rather than during, the holiday). Holiday is a health and safety issue, and pay should be calculated in a manner to ensure the worker would not be deterred from taking their entitlement. In such cases pay should be calculated using an average over a representative period. The ruling follows the Advocate General's opinion in the case, and builds on the court's previous ruling in BA v Williams.

The case will now return to the employment tribunal to determine whether UK law can be interpreted in line with the ruling. The recent trend of creative judicial interpretation suggests this is likely to be possible. The Advocate General proposed averaging pay over a 12 month period, but it may be that the tribunal will instead average over 12 weeks, given this is the period already used in UK law for workers with no normal working hours. (Lock v British Gas Trading C-539/12)

Similar issues arise where workers with normal working hours perform voluntary overtime, or earn work-based bonuses – should the worker's holiday pay (for the 4 weeks' EU minimum statutory holiday at least) reflect their average pay including overtime/bonuses, to ensure they are not deterred from taking holiday? Should overtime pay be viewed as intrinsically linked to the performance of tasks required under the worker's contract even where the work is voluntary – is it enough that the tasks carried out during voluntary overtime are the same tasks as required by the contract during normal hours? The EAT is due to consider this question in two cases at the end of July 2014 (Neil v Freightliner, Fulton v Bear Scotland).

Holiday pay claims can be brought within 3 months from the last of the series of deductions (or underpayments), therefore potentially going back years. However, there is an opportunity for employers to break the chain and thereby potentially render historic claims out of time, if they take action now. This would involve paying for upcoming holiday now at a rate in accordance with the ECJ ruling, rather than at basic salary, at least for the first 4 weeks of holiday entitlement. Of course this might alert employees to the issue, but claims in respect of previous holidays might already be out of time or would soon be so. Employers must also weigh up the chance of having overpaid, if the tribunal in Lock decides that UK law cannot be interpreted consistently with the ECJ ruling and so requires legislative amendment before affecting private employers, or if voluntary overtime is viewed differently from commission.

Employers would also be well advised to look carefully at the nature and drafting of any bonus schemes they operate for employees with fixed normal hours, to identify possible claims that holiday pay should include a bonus element, but also to minimise the potential for claims when drafting future bonus schemes.

Please do get in touch with your usual HSF contact if you would like to discuss this further.