Various recent rulings handed down by Employment Appeal Tribunals have brought into question how we calculate holiday pay. We know for certain that the Working Time Regulations can no longer be relied on in all cases. We now need to consider whether overtime and bonus payments need to be brought into the equation.

An interesting development has been the announcement made by the John Lewis Partnership.

The partnership is one of the first companies to publicly announce the costs to its business, £22m, as a result of adopting the legislation from next month. However the impact will be felt in all companies.

In May 2011, the Government published a consultation entitled ‘Consultation on Modern Workplaces’, we are still awaiting the Responses from the ‘Consultation on Modern Workplaces’ document in respect of changes to the 1998 Working Time Regulations. However, this is eagerly anticipated with respect to annual leave, as a number of decisions of the Court of Justice of the European Union (CJEU) and Employment Appeal Tribunals (EATs) have ruled on various conflicts that arise between the right to paid annual leave and other types of leave (i.e. sickness and maternity) as well as what should be included in holiday pay (overtime and commission in particular).

Lock v British Gas Trading

Mr Lock was employed by British Gas in a sales capacity. His monthly pay was made up of two main components – monthly salary and commission, calculated on sales achieved. During his vacation between 19 December 2011 and 03 January 2012, Mr Lock was unable to generate any sales which led to a reduction in his wages on his return to work – i.e. he was on holiday and not making any sales, therefore, no commission was generated. Mr Lock brought a claim for ‘outstanding’ holiday pay before the Employment Tribunal in Leicester. Essentially, the claim said it could not be right that his pay on his return to work was lower as a result of exercising his right under the WTR to take paid leave.

Both British Gas and the UK Government argued that under UK domestic legislation and practice, Mr Lock had not actually ‘lost’ any holiday pay and the intention of the EU Directive was met – during his leave period, he had received the pay to which he was entitled under his contract of employment. The case was referred to the European Court of Justice (ECJ) in November 2012.

In December 2013, the ECJ Advocate General Bot gave his Opinion in this case prior to the actual ruling. He said that the Employment Rights Act 1996 (Section 221) defined a week’s pay as the amount payable under the contract of employment or, where the worker has variable earnings, an average of pay over a 12-week period. However, the nature of Mr Lock’s commission payments was sufficiently permanent for them to be regarded as permanent. He said another concern was that workers in similar situations might actually be prevented from taking their holiday entitlement if they knew that their pay on return would be adversely affected. The WTR must ensure employees are not disadvantaged financially.

In May 2014, the ECJ ruling agreed with the Opinion from AG Bot. It said that the commission paid to Mr Lock was directly and intrinsically linked to the work that he did. Therefore, despite domestic practice, the commission should be taken into account when calculating the holiday pay that is paid to the worker. The ECJ referred the case back to the Leicester Employment Tribunal for them to decide on the calculation process in the light of the ruling given in this piece of case law. Such a calculation ruling is required to ensure that workers take their annual leave under the Working Time Regulations, are correctly compensated and do not suffer financial detriment for doing so.

The ruling from the ECJ means that any employee who has sales commission as part of their salary package should have that commission included in their holiday pay calculation. Quite how that will be achieved is another matter and we look forward to a ruling from the Employment Tribunal in this regard. At the moment, therefore what should we do? We need to be mindful of this case law and ruling from the ECJ and consider that an employee may be deterred from taking leave if they know their pay will suffer on their return from work (because they have been unable to earn commission whilst on leave). Do we look at using an average of the commission earned in the last, say, 12 months? This certainly seems the implication, given that Mr Lock’s average commission is quoted in the Employment Tribunal summary and ECJ ruling.

Further, is it only commission that we need to be concerned with or is it any other element of pay that can be said to be intrinsically linked and sufficiently permanent for them to be regarded as contractual remuneration – i.e. annual bonuses, regular overtime?

Employers need to look at their contractual leave policies and processes and consider whether there are any elements of an employee’s salary package that should be regarded as sufficiently permanent / regular for them to be regarded as normal pay.

Overtime and Holiday Pay

In November 2014, 3 Employment Appeals Tribunal (EAT) rulings (Bear Scotland versus Fulton, Amec vs Law and Hertel vs Wood) made the news – quite justifiably. The headline announcements were that:

So, what happened?

Starting at the beginning, the EU Working Time Directive entitles workers to be paid their ‘normal remuneration’ during the 4 week’s paid annual leave in their holiday year. The EU Directive was interpreted in the UK as the Working Time Regulations in 1998. 4 weeks equates to 20 days for someone working 5 days per week.

The Court of Justice of the European Union (CJEU) has already said that the UK’s Regulations did not meet the EU Directive in terms of defining ‘normal remuneration’. In the case of Lock v British Gas, it ruled that any payment that was intrinsically linked to the work that was performed should be included in the holiday pay calculation. The intrinsic linking in that case was a commission payment, though an employee may have other payments that are also sufficiently permanent for them to be regarded as normal remuneration.

Appropriately, therefore, fast forward to the above three cases. The ruling clarifies that the following items of pay must be included within the definition of normal remuneration:

The normal remuneration is calculated and paid at the rate of ‘a week’s pay’, as defined in The Employment Rights Act 1996 (ERA). Essentially, where a worker’s pay varies, the holiday pay calculation must be based upon the average normal remuneration that was paid in the 12 weeks before the holiday is taken.

Backdated Claims

With regard to backdated claims, the EAT ruled that the employee can claim that the employer has made an unlawful deduction from wages under ERA if their holiday pay calculation does not include the above elements. Employers and business groups had been concerned at the prospect of backdated claims going back as far as 1998, when the original Working Time Regulations were implemented in the UK. However, the EAT ruled that a claim for an unlawful deduction can only be made if the claim is made within three months of the incorrect holiday pay amount being paid.

In short, an employee has to bring a claim before an Employment Tribunal within three months of the last unlawful deduction being made from wages.

However, this still meant that, potentially, a ‘linked’ claim could go back as far as 1998 where an employee believes that they have been underpaid holiday pay because overtime payments were not included. There is no such cap on backdated claims fort have been omitted (or other items ‘intrinsically linked’ to the performance of the duties). Therefore, in December 2014, the UK Government put in place limiting legislation for back pay claims going back over many years. The Deductions from Wages (Limitation) Regulations 2014 has two impacts:

1 – Limitations on ERA Unlawful Deductions

Effective 01 July 2015, Regulation 2 of the 2014 Regulations say that Employment Tribunals (ET) do not have to consider a claim for an underpayment of wages (under ERA) that goes back more than two years (from 01 July 2015). Specifically, the ET does not have to consider underpayments of wages made up of ‘any fee, bonus, commission, holiday pay or other emolument referable to his employment’. The ET does have to consider any other underpayment of wages for Statutory elements such as SSP, SMP, guarantee payments etc. The explanatory notes of the draft legislation say:

In particular these changes relate to complaints in respect of deductions from wages which arise as a result of the employer failing to pay appropriate levels of holiday pay in accordance with the requirements of the Working Time Regulations 1998 which implements the UK’s obligations under the Working Time Directive (Directive 2003/88/EC of the European Parliament and of the Council (a)).

With regard to backdated claims for underpayments regarding overtime, the ruling was complicated. It said that the three months deadline for bringing a claim may be part of a series, or chain, of consecutive underpayments – e.g. an underpayment in April 2014, an underpayment in June 2014, an underpayment in September 2014 etc etc. Therefore, if a series of underpayments has occurred and each one separated by three months or less, it is possible that a claim for an unlawful deduction from wages under ERA may stretch back over a number of years. In reality, however, this was unlikely.

With regard to underpayments for commission, there was no such time limit imposed. The effect of the 2014 Regulations is to deny the opportunity for employees and employment lawyers to make claims for unlawful deductions going back more than 2 years from July 2015. It does not apply to claims for unlawful deductions that are presented before this time. Therefore, anyone with a valid claim of linked underpayments of holiday pay (or commission) could, in theory, make a claim and go back to the introduction of the Working Time Regulations in 1998.

It is disappointing that employers have been conforming to the guidelines in the Working Time Regulations for many years, only to be advised that these do not conform to the EU Directive on which they are based. So, where do employers go from here? It seems likely that employers will want to reform their HR and payroll practices to include overtime into the holiday pay calculation (as well as payments that are intrinsically linked to the work that is performed). Organisations may want to review their overtime policies altogether. We would have thought that employers are going to want to have talks internally with the employees and employee representatives. The Government have said that employers can contact the Advisory, Conciliation and Arbitration Service (ACAS) for free and confidential advice. Their helpline number is 0300 123 1100.

Note that the EAT only have jurisdiction to rule on issues affecting Great Britain (where the Working Time Regulations and Employment Rights Act operate).