Do you have any bonus schemes or commission payable to your employees?  Recent case law has brought to light the issue of whether employers are applying the Working Time Regulations correctly when calculating holiday pay.

Under the Working Time Regulations 1998, employers should calculate holiday pay based on an average weekly wage which includes any extra payments for Sunday working, not just on normal hours.

Employees are all entitled to a week’s pay in respect of each week of their statutory 5.6 weeks’ (or 28 days’) holiday entitlement. A week’s pay is either:

• The normal rate of weekly pay, if the employee’s hours or pay does not vary, or
• The average remuneration over the previous 12 weeks if the employee’s hours or remuneration varies.

There are a number of cases which deal with the issue of overtime payment and holiday pay, but there is no definitive position as to whether overtime or commission earnings should always be taken into account when calculating holiday pay and there has been significant uncertainty in this area.

The predominant trend in the case law seems to be that holiday pay should take into account commission and other allowances.

The leading case is probably the European Court of Justice (ECJ) decision in the British case of Lock v. British Gas Trading Ltd which clearly decided that the right to 5.6 weeks paid annual leave under the Working Time Regulations should include an element to cover commission a worker would normally earn. The ECJ said that anyone whose income was heavily dependent on the commission would suffer a financial disadvantage in the form of lost remuneration following every holiday and so they would avoid taking holidays which was not the intention of the legislation.

In the Lock case, the ECJ said that a specific analysis of holiday pay is required to determine what should be paid for a period of leave. In that, the commission fluctuated from month to month but was permanent enough to form a normal part of salary.

How holiday pay should be calculated in fluctuating circumstances is a matter for the national courts to decide so it is almost certain that legislation will be amended to reflect this ruling.

If overtime is guaranteed and employees are regularly working overtime, it is likely that overtime is part of their normal hours and should be taken into account when calculating holiday pay.

It appears that going forward, all aspects of pay that are ‘intrinsic’ to the performance of the work may have to be included in the calculation of holiday pay. In principle, such payments that are intrinsically linked to the performance of the job might include bonuses, commission, overtime pay, performance-related pay, call-out supplements and anti-social hours allowances.

Claiming back-dated payments for holiday pay

There may be the potential for some employees to claim lost payments in previous years.

Employers who only take basic pay into account when calculating holiday pay when commission arrangements are normally in place may be exposed to unlawful deductions of wages claims for underpayments made over a number of years.

On the one hand, taking overtime into account now will reduce the risk of claims, on the other, it may create contractual entitlements to overtime before the Employment Appeal Tribunal gives any further guidance on this question.

How far back can employees claim unpaid commission?

This will depend on what type of legal claim is brought.

• A claim may be brought under Regulation 30 of the Working Time Regulations 1998 (WTR) for non-payment/underpayment of a holiday.  The claim has to be brought within three months of the date on which the payment should have been made.  As a result, it is unlikely that many claims will be brought under Regulation 30 except perhaps a test case;

• A claim may be brought in the county court for breach of contract, in which case claims may go back six years; however the precise length of time an employee can go back will depend on whether the series of deductions has been broken at any point, for example because they were not commission based at that point and therefore received all the holiday pay they were entitled to or because they did not earn any commission in the appropriate reference period (yet to be determined) and therefore received all the holiday pay they were entitled to;

• Each case under the unlawful deductions approach will, therefore, need to be examined to see if there has been any break in the series of deductions.  If there has, the employee will only be able to go back as far as the first deduction in the last series of deductions (and will have to bring his claim within three months of the last deduction in that series).

Options for employers

Until further case law is available what do employers do in the meantime? There are principally three options for employers;

Option 1 – Do nothing.  Sit tight and wait for the definitive outcome of the recent case law to guide your next steps.

Option 2 – Do a quick analysis to check what the possible financial risks are for your organisation in the event of a claim, including how your employee’s holiday is calculated, average commission earned in a year and anything else you think appropriate to consider at this stage.

Option 3 – Do a complete analysis/audit of your contracts, any policies relating to pay and holiday pay calculations.  This could include examining commission policies to see which additional payments are part of their workers’ salary or perhaps try to vary commission structures. This may be difficult if these have become contractual unless the employees agree to a variation. You could then make changes in advance of any case law decisions.

If you would like support for Options 2 and 3, we will be able to advise you on appropriate action and assist you going forward.

If you choose to go for Option 1, we will, of course, keep you posted on any developments.

We can help you with any and all people needs.
Email info@peoplebusiness.co.uk or call us on 01932 874 944.