Holiday Pay

Do any of your employees receive basic pay and commission on sales in their salaries?  Do any work overtime?  Do any receive allowances relating to their roles?

Most employment contracts include a clause that holiday pay will be calculated on the basis of their basic pay alone which has been the accepted legal position, based on a Court of Appeal case in 2003.

However things are set to change now.  In the first case a depot worker’s contract specified a 35 hour working week of seven hour shifts and overtime when necessary. He regularly worked up to nine hours each day and sometimes 12 hours to cover for his colleagues. He received enhanced pay premiums when working in excess of the contractual seven hours a day. His holiday pay only reflected his basic salary. The employment tribunal found that the overtime hours worked were ‘intrinsically linked’ to his performance of his role and it was irrelevant whether the overtime was voluntary or not.

A second case concerning the level of pay in respect of annual leave relates to commission payments. The claimant was paid a basic salary plus variable commission that was paid in arrears. He took two weeks paid annual leave. During this period he received his basic salary plus commission from previous sales. However, while on annual leave he was unable to generate commission, so he received a reduced income in the months following his return to work. The claimant argued at the employment tribunal that he has effectively been paid too little holiday pay as a consequence; and the tribunal referred this question to the ECJ. A European Court Advocate General has recently produced an opinion on this issue which is shortly to be considered by the European Court of Justice which states that Mr Lock should not just receive basic pay plus commission falling due during the holiday period – it should also include compensation for the fact that he would be unable to make sales and therefore earn commission while on annual leave.

Finally British Airways pilots alleged certain flying allowances and time away from base pay should be included in the calculation of their holiday pay. The case rumbled on for months going to the Court of Appeal, Supreme Court and the ECJ. Although the case is complex and concerns the Civil Aviation Working Time Regulations, the basic outcome is that if a worker’s pay during the four-weeks statutory holiday does not correspond with their normal remuneration this is probably in breach of the Working Time Directive and must be interpreted accordingly.

Implications for employers

This means that workers could earn more while on annual leave to make up for the fact that they are likely to earn less after a period of annual leave.

Employers should review their overtime arrangements to ensure they have sufficient control over them, and can avoid abuse and manipulation of holiday pay.

Stay tuned for further developments on these important issues.