Holiday pay – commission should be included says EAT.

If you employ one of the 5 million people who are entitled to commission or overtime, are you sure you are paying holiday pay correctly? In this article we clear up which earnings qualify for holiday pay and what employers should do to avoid claims for underpaid holiday, which could be substantial in some cases.

 

The long running case of Lock Vs British Gas has now been through the appeal tribunal, who have concluded that holiday pay should include an amount to reflect the commission an employee would have earned had they been at work.

 

Mr Lock is a salesman and a substantial chunk of his earnings comes from commission on deals achieved. When on holiday he is not concluding deals and so his income drops for the period of his holiday.

His case was one of a range of holiday cases we reported on last year, and the outcome was, and still is following the EAT decision, that holiday pay should consist of ‘normal earnings’. This is defined in the Working Time Directive (WTD), the piece of legislation governing the rules on holiday and holiday pay.

Unfortunately the WTD doesn’t define what ‘normal earnings’ are, and so hundreds of hours of court time have been spent trying to establish this. Where we are at the moment is that ‘normal earnings’ includes commission, ‘guaranteed overtime’ (where the employer guarantees to provide X hours overtime a week and the employee has to work it) and ‘non-guaranteed overtime’ (where the employer doesn’t have to offer overtime, but when it does, the employee has to work it.) The current situation is that voluntary overtime (employer offers, employee doesn’t have to do) does not have to be included in holiday pay.

There is a twist. The European version of the WTD requires only 4 weeks paid holiday. In the UK we have opted to increase this to 5.6 weeks (see the earlier article on BREXIT – the employment law implications). Because the European WTD takes preference UK employers only need to take into account 4 weeks’ worth of commission, overtime etc. Let’s consider an example.

Vanessa earns £400 per week. She also typically earns £40 in sales commissions and is required to work an additional 6 hours overtime, amounting to another £64. Her ‘normal’ earnings then are £504 per week. As a full time employee, she is entitled to 5.6 weeks holiday. 4 weeks of these should be paid at £504 per week, the remaining 1.6 weeks (the UK excess holiday) can be paid at £400 per week, her basic wage.

 

So what could happen if Vanessa’s employer only paid her £400 per week for the whole 5.6 weeks of her holiday? (we believe there are a lot of employers in this situation.) Vanessa in these circumstances could bring a claim against her employer (as Mr Lock did) for the underpayment of holiday, in this case £104 per week. Her claim would be limited to 2 years lost earnings, or 8 weeks @ £104 = £832.

So what should her employer do to avoid back claims for unpaid holiday pay? Although British Gas has been given leave to appeal the Lock case, employers in this situation might decide to start including commission and guaranteed and non-guaranteed overtime now. If her employer started to do that from 28thMarch for example, Vanessa would have to bring her claim by the 28th June, or she will lose the right to bring a case. This is because a case must be brought within 3 months of the last breach of law, hence, correct the error today, you will be free of the risk of litigation in 3 months.

This is the choice very many employers now face – a continuing breach is likely to bring back claims at some point, and the longer it is left the more likely claims are. A bit like PPI, we wonder how long it will take for an enterprising law firm to start a marketing campaign ‘Are you one of the 5 million employees owed underpaid holiday pay? Legal Beaks will get it back for you…call 0800 800 800…..’ etc.

If you’re thinking of outsourcing your HR why not contact myhrdept.co.uk. With full service Premium Plus packages for medium sized companies typically from only a few hundred per month (and from only £100 per month for smaller companies and start-ups) and fixed price HR support options available for one-off issues, we believe we offer the best combination of quality and price available in the UK. Call us on 01628 820515 to discuss your requirements or email us here and we’ll call you back.

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