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19-09-2014

Holiday pay can be one of those topics that many businesses tend to overlook. However, a recent ECJ decision has put this issue firmly in the spotlight.

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All UK employees are entitled to at least 5.6 weeks (28 days) paid time off per year under the Working Time Regulations 1998.

The Working Time Regulations were implemented as a consequence of the European Working Time Directive. That Directive deals with the issue of holiday entitlement and holiday pay. There have been numerous cases on the issue of holiday pay and how it should be calculated and now the European Court has given further guidance as it has been asked to rule whether or not the UK is implementing the Working Time Directive correctly given conflicting authorities on the subject in the Employment Tribunals.

The ECJ has confirmed in the case of Lock v British Gas Trading Limited that employers have to include commission as part of holiday pay for those workers who regularly receive it as part of their pay. Here, Lock’s commission was directly linked to the work he carried out. He successfully argued that by not including it in the calculation of his holiday pay, it acted as a deterrent to him exercising the right to annual leave and that this was contrary to the intention of the legislation.

The matter has now been referred back to the Employment Tribunal for it to interpret the decision. Given the potential for appeals it will be a long time before the position is settled.

However employers may find their cash flow is affected as they may now have to pay higher levels of holiday pay and face claims for backdated holiday pay.

This is likely to cause particular issues in administrations, where it is entirely possible that there are no accurate records. It may also potentially affect TUPE transfers where acquiring businesses may end up with unexpected liabilities.

Matters are further complicated by the fact that under the Working Time Directive, workers are only entitled to 4 weeks annual holiday and so the ECJ ruling should only apply to this leave entitlement, not the additional 1.6 weeks under the Working Time Regulations. It also should not affect contractual holiday pay over and above the 4 week entitlement. In addition, claims for backdated holiday pay must be made to an employment tribunal within three months of the last underpayment.

Therefore, certain categories of workers such as those who left their jobs more than 3 months ago and who have not yet presented a claim, will be out of time.

Nevertheless, holiday pay will still create a logistical problem for businesses when trying to work out their potential liabilities. It should also be noted that whilst the case of Lock looked at the issue of commission, other types of payments such as regular overtime, on call payments etc. may have to be treated in the same way.

It has been reported that some employers, particularly those in the public sector, have already changed the way in which they calculate holiday pay.

Sarah Rushton (srushton@moonbeever.com)

This is intended for general information only and should not be considered as giving advice in relation to any individual case nor be taken as applying to any particular case. No liability is accepted for any such use of the information contained in this e-alert. 

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