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We're all going on a summer holiday...with or without commission?

View profile for Sarah Whitemore
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Holiday pay calculations under the Working Time Regulations have been subject to many changes over the years, and it looks like this is set to continue.  2014 saw several tribunal claims challenge the proposition that overtime and commission payments should not be included within weekly pay, and consequently holiday pay.  Sarah Whitemore, Employment Partner, reviews the cases and explains how employers can manage their holiday pay calculations during this period of uncertainty until final judgements are delivered.

In the case of Williams v British Airways the European Court of Justice (ECJ) looked at the issue of stand by payments due to pilots.  The BA pilots are paid by reference to the time spent in the air, the time spent on the ground at the destination airport and other payments such as sector and subsistence allowances.  BA did not include these ancillary payments within the calculation of holiday pay.  The pilots’ claims were referred to the ECJ and they determined that holiday pay should include ‘all the components intrinsically linked to the performance of their tasks’.

This decision was followed chronologically by the case of Fulton v Bear Scotland in which the tribunal found that the employee should have his overtime reflected in his holiday pay, and that holiday calculations should include certain overtime work and not be limited to the basic pay.

Finally there is the case of Lock v British Gas which again was referred to the ECJ and which related to employees of British Gas whose pay was split as to basic pay (40%) and commission (60%).  The British Gas employees said that if they were to apply the BA case then the commission payments were intrinsically linked to the performance of their tasks and therefore should be included within their holiday pay calculation.  The ECJ confirmed this view, stating that holiday pay can no longer be based purely on basic pay where the worker is also reliant on commission.  According to the ECJ, workers in this situation would suffer a financial disadvantage during their statutory holiday leave, therefore deterring the employee from taking their entitlement.

These cases were referred to the ECJ by the Employment Appeals Tribunal (EAT); the ECJ answers questions put by the EAT, it does not decide the case. Having answered those questions the case is sent back to the EAT for a decision, which may itself send it back to the original tribunal for a decision on the facts now the law has been “clarified”.

Until the cases are decided in the EAT, employers would be unsure how to proceed in similar circumstances, and they also faced the grim possibility of breach of contract and unlawful deduction from wages claims relating to historical payments/deductions. This is because the courts are not changing the law, merely stating what it has always been, so there is uncertainty as to whether employees will be able to claim deductions backdated over many years possibly until 1998 when the Working Time Regulations came into effect.

The Government has introduced regulations to ease the uncertainty. The Deduction from Wages (Limitation) Regulations 2014 introduced on 8 January 2015 will limit claims for backdated holiday pay in the employment tribunals to deductions in the preceding two years.  These new rules will only apply to claims issued from 1 July 2015, and it is anticipated that there may be a flurry of claims in the intervening period by employees seeking to recover the longstanding and historical holiday pay payments.

Employees who believe that they were underpaid holiday pay in the past will still be able to bring those claims in the civil courts as breach of contract claims if they can show that they had a contractual right to receive the holiday pay as opposed to simply the statutory right under the Working Time Regulations.  However, the Government has tried to reduce those claims too, by stating in the new regulations that the right to statutory holiday pay does not affect the contractual right to holiday pay.  So, if there was a contractual clause saying that the employee was entitled to holiday pay at basic pay rates only, then that is all they would be able to claim.

That begs the question of how the courts would interpret a contract that just says the employee is entitled to 25 days “paid holiday” as they would have to consider the meaning of the words “paid holiday”. In drafting the Regulations the Government presumably hoped that they will conclude it means what people thought it meant at the time the contract was entered into—basic pay only.

So, historic unlawful deduction of wages claims are still a possibility, but those claims will either have to be issued in the employment tribunal before 1st July (expect a raft of them from unionised staff) or rely on a specific contractual obligation.

There are now three time restrictions on unlawful deductions from wages claims in the tribunals:

  • A claim for unlawful deductions from wages must be brought within three months of the last deduction.
  • A series of deductions is broken by there being a three month gap at any time so claims for deductions prior to that gap are prevented.  However, this is the effect of the decision in the Hertel and Amec cases and could be appealed in the future.
  • The new regulations will impose a third restriction so in circumstances where there is an unbroken series of deductions going back several years, a tribunal claim can only be brought which covers the two years up to the date the claim is presented to an Employment Tribunal, if the claim is presented on or after 1 July 2015.

There is still an element of uncertainty until the cases are brought to a conclusion later this year, and to combat this some employers are opting to take action now to cap exposure to claims, to start the clock running in relation to the time limit for claims and to resolve disputes before they arise by starting to  pay overtime/commission as part of holiday pay.

Some employers have also decided to introduce an averaging of commission and overtime pay for the purpose of arriving at correct holiday pay. The question is the time period over which the averaging should be carried out.  The Working Time Regulations (by reference to the Employment Rights Act 1996) say that averaging should be in respect of the preceding 12 weeks but the European Court, despite the Advocate General’s recommendation that it should be the preceding 12 months, has not said that.  Employers are advised to conduct an audit to establish what level of pay would apply for either option and the extent to which they are exposed in relation to the risk of claims.

For those businesses where overtime and commission is payable to employees, there are four options that employment lawyers are recommending are adopted until the law is clarified:

  • Pay back pay claims now, either voluntarily or when asked.
  • Include average overtime/commission in future holiday pay.
  • Manage overtime and commission so as to reduce their impact on holiday pay.
  • Do nothing until the law is clarified or changes.

There are advantages and disadvantages to each of these options, and the ideal solution for each employer will be determined by the size of its business, sector, workforce and current holiday pay arrangements.  It is strongly advised that specific legal guidance is sought before implementing any of the strategies identified above.

For a review of your contracts to evaluate which option would be most suitable for your business, or to have any questions answered about holiday pay calculations, contact Sarah or the Employment Team on 02380 717462.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.