Posted on 14th August 2014

Calculating Holiday Pay Just Got Tougher

Nick Poole, Partner at Latimer Hinks Solicitors

Latimer Hinks Solicitorsis warning employers to review their holiday pay structures following a significant ruling by the European Court of Justice (ECJ).

The ruling, which has made the calculation of holiday pay increasingly difficult, means that employers will now have to factor performance-related commission into any calculation of holiday pay where the payment is permanent enough to be regarded as a normal part of a salary. Someone earning £100,000 made up of 60% commission and 40% basic salary, for example, should receive average commission of £1,154 for each week of holiday.

However, it also allows employees to make a claim in respect of the immediately preceding six years. So, using the above example, the value of the claim could be very substantial.

Under the EU Working Time Directive, which is implemented in the UK through the Working Time Regulations 1998, workers have the right to 5.6 weeks of paid annual leave at the statutory rate of a weeks pay for each week of leave and, if that varies, it is calculated by working out the average over the previous 12 weeks.

In the case of Lock v British Gas Trading Ltd, which was referred to the ECJ following an employment tribunal claim, it was ruled that a sales consultant at British Gas, whose salary was largely based on successful sales, would suffer a financial disadvantage in the form of less remuneration after a holiday.

Nick Poole, Partner in the Commercial Department at Latimer Hinks Solicitors, said: "The calculation of holiday pay has become a minefield and it just got even tougher. A way of averaging commission over a previous period could be used, but its not just about how much should be paid during a holiday, its also about making sure that employees are not financially worse off in the period following."

The ruling applies to the statutory minimum of 5.6 weeks annual leave to which all employees are entitled under the Working Time Regulations.

Mr Poole added: "Employers may want to think about reviewing their employment documents as regards what commission will be allowed in any calculation of holiday pay. Now is the right time to get this structure updated and to be clear about how it has been affected by the ruling. Theres been talk of employees taking strategic holidays, after a particularly lucrative period for example, and it all needs taking into account.

Within the next few months, the Employment Appeal Tribunal in the UK is expected to rule on three cases revolving around whether employers should include regular, but non-contractual, overtime in holiday pay calculations.

For further information contact Nick Poole: 01325 341500