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Important Case on Holiday Pay

You may have heard in the news that there has been an important case on the subject of holiday pay.

In British Gas v Lock the European Court of Justice (ECJ) has effectively decided that, in calculating holiday pay, account must be taken of a worker’s whole remuneration, including commission, rather than just limiting holiday pay to basic salary.

The facts briefly, are as follows. Mr Lock is a salesman for British Gas. Commission makes up the majority of his monthly earnings. He is paid commission in arrears based on sales previously achieved. When he takes holiday he is paid basic salary and commission previously earned and so does not suffer any drop in earnings at the time he takes his holiday. However, when he is on holiday he is of course unable to earn commission through sales. He therefore suffers a drop in earnings in the period following his holiday.

The ECJ reiterated that entitlement to paid holiday is a particularly important principle of European law. They clarified that, when leave is taken, that should be comparable, financially, to periods of work. There should be nothing to deter a worker from taking paid leave. The ECJ observed that a future drop in pay might well deter a worker from taking leave and that this was unacceptable. Accordingly, it was not legitimate to base holiday pay solely on basic salary. The court followed the existing authority of Williams and Others v British Airways in which the ECJ stated that any payments “intrinsically linked to the performance of tasks required under the contract of employment” should be counted towards holiday pay.

As a matter of general principle then, it now seems clear that, in calculating holiday pay, account must be taken of all remuneration received by an employee, including, for example, overtime and commission. However, somewhat unhelpfully, the ECJ left it up to national courts to determine how any commission due to a worker during paid leave ought to be factored in. This leaves advisers and HR practitioners in a position of some difficulty in deciding how to implement this change in the law.

At the end of July, the UK case of Neal v. Freightliner Limited is before the Employment Appeal Tribunal (EAT). It is to be hoped that the EAT will grapple with the issue of implementing this change, or at least give some guidance as to how, in the UK context, holiday pay ought to be calculated in light of this case. Our advice to clients is to await this decision before implementing any specific changes in arrangements for calculating holiday pay.

That said, since the principle is clear that employees should suffer no financial loss as a result of taking paid leave, if you are challenged on this by an employee before the decision in Neal, we would suggest that the best that an employer can do is to take an average of an employee’s earnings over a period of time leading up to the holiday, factoring in all remuneration, not just basic salary; and to base holiday pay on that calculation. If you find yourself in that situation, please contact us for specific advice.

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