Holiday pay rule changes are on the horizon

They continue the recent trend of EU rulings on statutory minimum holiday and holiday pay entitlement, which have often found in favour of employees.

Such rulings emphasise the fact that these minimum holiday rights are an EU health and safety measure under the Working Time Directive, which is designed to ensure that workers are guaranteed reasonable pay during annual leave, hence the tone of recent rulings in favour of employees.

In one recent EU ruling, in Locke v British Gas Trading Ltd, the European Court ruled last month that sales commission should be taken into account when calculating holiday pay. 

The Court referred to their earlier ruling, last Autumn, in the British Airways v Williams pilots’ challenge, when it held that holiday pay had to be based on normal remuneration, which is “linked intrinsically” to the performance of the worker’s contractual duties – i.e. a wide interpretation.

In Locke the concern was that the employee would lose an important part of his likely earnings, in not being able to generate commission whilst on leave, which might in turn deter him from taking leave. The case has now been referred back to the English Employment Tribunal to consider how the commission element should be calculated, since plainly there are various options!

This approach ties on with the developing case law around whether overtime payments from regular, albeit non-contractual, overtime, should also be included in calculating statutory minimum holiday pay. 

The employers have appealed the Employment Tribunal’s finding, in Neal v Freightliner Ltd, that regular overtime pay should be included. That appeal, and a similar case (Fulton & Baxter v Bear Scotland Ltd), have been joined, and are due to be heard before the Employment Appeal Tribunal at the end of July. It is possible they will be referred on to Europe, so there may not be final clarity on this important issue for some time.

However, employers would be wise to note the direction of travel, to audit current arrangements which might be caught, and to budget for holiday pay arrears. As to the amount of potential claims, workers could potentially claim for arrears going back to implementation of the Working Time protections on 1st October 1998. 

They would have to lodge claims within three months of the last underpayment, and can only claim in respect of the EU – four weeks basic holiday entitlement, rather than the additional 1.6 weeks under the Working Time Regulations, or any longer contractual holiday entitlement. 

That said, in many cases employers could find themselves facing very large claims, and so will want to monitor developments closely, and to budget accordingly. 

Nikki Duncan is a partner at the law firm Michelmores

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