Where an employee had been dismissed on the ground of medical incapacity while his contractual...
Holiday pay, overtime and commission
- Case law on holiday pay, overtime and commission
- Bringing holiday pay claims in practice
- Practical steps for employers to take to manage holiday pay issues
- This guide discusses the impact on holiday pay calculations of various case law developments. It looks at the situation now, what employees can claim going forward, any claims for back pay and what practical steps employers can take to minimise the impact on their business.
CASE LAW ON HOLIDAY PAY, OVERTIME AND COMMISSION
- In May 2014, the European Court of Justice confirmed, in Lock v British Gas Trading Ltd, that commission must be included in the calculation of holiday pay where commission is intrinsically linked to the job.
- Closely following this the EAT decided (in November 2014) in Bear Scotland Ltd v Fulton, that even if an employer is not obliged to provide overtime to an employee but they are obliged to work it, then this must be included when calculating holiday pay for the 20 days of European statutory holiday required under the Working Time Directive (rather than the 28 days implemented under the Working Time Regulations). It also said that allowances which went over and above a direct reimbursement of cost, must also be included in the calculation of holiday pay.
- The EAT in Bear , in an attempt to cut off back claims, confirmed that where there is a break of three months or more between holidays then the ‘chain’ is broken and so back claims cannot be made. So, although employers will need to take into account overtime and commission payments when paying employees their holiday pay moving forwards, because of this limitation, their claims for unlawful deductions for back pay may have been restricted. There was no appeal in Bear and British Gas unsuccessfully appealed the case up to the Court of Appeal and were refused permission to appeal to the Supreme Court.
- In June 2017, the ECJ gave an opinion in King v Sash Windows Workshop Ltd which said that employers must give workers the facility to take paid holiday and workers do not have to take holiday to be able to claim payment for it. It also said that refusal to give workers paid holiday is considered as ‘prevention’ and workers can claim unpaid holiday for the whole of their employment or up to the date when paid holiday was offered, whichever is the earliest. This is only an opinion at the moment but if confirmed by the ECJ it will mean that if holiday pay is denied completely then there is no cap on going back.
- In July 2017 the Supreme Court concluded that tribunal fees are unlawful and should be repaid. This might mean that many workers who felt prevented from bringing claims for holiday pay within time because of the prospect of fees, will be allowed to bring their claims out of time.
- In August 2017 the EAT held in Dudley Metropolitan Borough Council v Willets that voluntary overtime worked with sufficient regularity had to be included in the calculation of the 20 days of European statutory holiday. In that case it was one week in every five.
- The starting point is - pending any further decision of the ECJ - when did an employee last have European statutory holiday for which they were paid? If it was more than three months ago then they have no claim in an employment tribunal because claims must be brought within that time period.
- The EAT was also clear that it was not open to an employee to decide which holiday was the four weeks’ statutory holiday during which they should be paid non-voluntary overtime and commission and what was their contractual holiday. The EAT went on to say that it will be assumed that the statutory will be used up first and so if employees have a holiday year running until April it may well be that recent holiday is contractual and not statutory and so the chain is broken anyway.
- For employees who have made a claim in time (i.e. within three months of the last deduction) and where there is not more than three months’ gap between each holiday claimed for, any claim submitted since 1 July 2015 is now limited to a maximum period of two years (see the Deductions from Wages (Limitation) Regulations 2014).
- Whilst there was also a real concern that employees may consider submitting claims in the county court for breach of contract, this avenue was also cut off with effect from 8 January 2015 (see the Deductions from Wages (Limitation) Regulations 2014).
- What the tribunal in Lock and the EAT in Bear did not address was the relevant reference period over which such commission/overtime must be calculated. This must be decided by the Leicester Tribunal now that the appeals have been exhausted.
BRINGING HOLIDAY PAY CLAIMS IN PRACTICE
- In practical terms, complaints for underpaid holiday lodged before 1 July 2015, provided that they were lodged in time, i.e. within three months of the last deduction, can theoretically claim back to 1998 provided that there is not a break of more than three months between holidays and existing claims for commission can be amended to include claims for non-guaranteed overtime following the decision in Bear.
- For complaints lodged on or after 1 July 2015, they are still limited by their needing to be no more than three months between holidays but they cannot claim back further than the last two years prior to the date the complaint was issued.
- This is subject to the decision in King v Sash Windows (see above) and also any potential successful arguments about claims being brought out of time following the Supreme Court’s decision in August 2017 that tribunal fees are unlawful.
PRACTICAL STEPS FOR EMPLOYERS TO TAKE TO MANAGE HOLIDAY PAY ISSUES
- Identify whether any of your staff are actually affected by determining the nature of their commission and overtime. Whilst it might be called ‘commission’ is it actually a bonus which is not affected by the employee being on holiday. Payments linked intrinsically to the performance of the tasks which the worker is required to carry out under their contract of employment, payments which relate to the worker’s professional and personal status and an amount to reflect the contractual results-based commission a worker ordinarily receives should all be included.
- Does the employee get overtime and if so is this where the employee is obliged to work it if you ask or is it voluntary but worked with sufficient regularity? If so this, together with compulsory overtime (which has always been included in the calculation of holiday pay) must be taken into account.
- As employers are likely to receive collective grievances and possible claims it may be that they can reach an agreement with the unions/employees and it may be that such an agreement will have to agree to include voluntary overtime.
- Identify whether you pay any other allowances, such as travel time payments, (which are not just a reimbursement of employees’ expenses but constitute taxable remuneration for HMRC purposes) as if they are closely linked to their job then it’s likely that they should be taken into account.
- Consider the implications of increased pay for holidays on pension payments, especially if you have auto enrolled.
- In order to make a payment of holiday pay including overtime and commission (following on from the Lock case), you will need to establish a reference period to calculate the additional overtime/commission pay. Neither the EAT in Bear nor the tribunal in Lock addressed or set out what an appropriate reference period should be; the WTR says 12 weeks and the ECJ said it was possible it could be 12 months. So until we are given alternative guidance by the tribunal we are technically bound by the WTR but employers should determine a sensible reference period depending on the nature of the business they carry out. This will vary from business to business as a 12-week period may be reasonable for some organisations, whereas others will opt for a 12-month reference period to take into account peaks and troughs in overtime or commission throughout the year. If you can demonstrate that you have thought about the period clearly and have reached a reasonable and sensible conclusion, then this is unlikely to be too heavily criticised in the future.
- In relation to claims for back pay, if such a claim is made then you should review each employee’s holiday record and determine when they took their European statutory holiday of 20 days. As it is expected that they would take this first in a year, then it may be that this was more than three months ago and so the claim is out of time.
- Also look to see whether there is a break of three months between any payments for periods of leave when they should have received annual leave including overtime/commission. If there has been a gap of three months since the last time they were paid for holiday, then any claim for unlawful deduction from wages for earlier deductions would be out of time and no further payment is required.
- If an employee brings a claim and an employer wants to settle it is possible to settle all claims relating to holiday pay using the pre claim conciliation services of ACAS. This ensures that as a company, you have certainty about what you are paying out and you are able to prevent any further historic claims.
- Irrespective of whether the employee has raised it or not, where there has not been a gap of three months between deductions, you should consider making payment for commission and non-voluntary and regular overtime for all holiday taken in the last three months. This means that the employee cannot bring a claim in the tribunal because the only claim he or she would have is for a series of deductions more than three months ago, and there is a limit of three months to bring a claim for unlawful deduction from wages. However, you need to keep in mind that if, once the issue has been decided, the reference period is different from the one that you picked and as a result more holiday pay is due to an employee then employees may still be in time to bring this claim – so keep it under review.
- The EAT ruling in Bear suggests that overtime (and therefore also commission) should only be taken into account during the minimum four weeks leave provided for by the Working Time Directive and not the additional 1.6 weeks’ leave provided for by the Working Time Regulations. So while there is only an obligation to include overtime and commission in holiday pay for the period of four weeks, you should consider whether you want effectively to divide payments for both types of annual leave or whether the cost, time and effort of calculating two different rates of pay for annual leave is worthwhile. The nature of the employee’s role and whether overtime forms a large proportion of earnings is likely to shape your decision.
- Consider whether you want/need to restructure your remuneration package to limit the future cost upon the business. For example, it may be possible to remove a contractual right to overtime and the ability to work voluntary overtime and instead increase basic salary or pay annual bonuses based on the entire organisation’s performance or offer payment in lieu instead. You may also consider a cheaper option is to increase headcount.
- Whichever route you take, it is crucial that your contracts and policies are updated to reflect the changes and ensure that managers understand how holiday pay is going to be calculated going forward.
- Remind managers to forward grievances and/or claims for unpaid holiday to a specified person internally and to make sure reception know who ACAS should speak to if they ring up for early conciliation discussions. This ensures a uniform and prompt response from the business and allows for legal advice to be taken where appropriate.
- Whether this position will change as a result of Brexit remains to be seen.