Holiday pay and commission – what is the latest?

Written on 3 Feb 2015

Today sees the Lock case on commission and holiday pay back in the Leicester Employment Tribunal (“ET”) following a referral to the Court of European Justice (“ECJ”). The ET will be considering whether or not the Working Time Regulations 1998 (“WTR”) can be interpreted to reflect the ECJ ruling in May (see here) that holiday pay should reflect a worker’s normal remuneration (in this case Mr Lock’s commission) and if so, how Mr Lock’s holiday pay should be calculated. A decision may however take several months.

Can we expect guidance on how holiday pay should be calculated?

Following European rulings and the recent Employment Appeal Tribunal (“EAT”) decision in Bear Scotland looking at overtime pay and travel allowances (see here), many employers are now pretty much accepting that their holiday pay calculations must change to ensure they reflect a worker’s normal remuneration going forward. Indeed, it has been widely reported that John Lewis has already taken steps in this respect (see here).

It is the “how” which has become the thorny issue – particularly given that the courts are working with “interpreting” a set of rigid existing rules. There is little, if any, guidance on the how for employers going forward and those who do make changes to holiday pay potentially risk still being in breach. Whilst the ET will reach a decision based on the facts of Mr Lock’s case and the commission scheme operated by British Gas, it is hoped that this will provide some guidance for employers on how holiday pay should be approached in this new era. Will it be sufficient for an employer to show that it has structured its commission arrangements or adjusted holiday pay calculations to reasonably reflect normal remuneration? Or is compliance with a more prescriptive formula required e.g. calculating holiday pay based on a particular reference period? Both raise potentially tricky issues for employers – a reasonableness test is vulnerable to being tested by disgruntled workers but a prescriptive formula might allow employees to game the system, organising their work and holiday to maximise holiday pay.

And what about back-dated claims?

Of interest also will be how the ET approaches the EAT decision in Bear Scotland on retrospective claims for breach of holiday pay. The EAT boldly stepped out in Bear Scotland to hold that historic holiday pay claims would be time limited to the point where there was a gap of three months between successive underpayments. We of course now also have new regulations introduced in January which limit any claims for back-dated holiday pay brought from July this year to two years (although concerns have been raised over the legitimacy of these regulations). See our alert here.

We shall keep you updated on any further developments but in the meantime please do not hesitate to contact our usual OC Contact if you would like advice on this issue.