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Holiday Pay Commission

ONE employer recently described it to me as “a second nightmare on the HR horizon.” CBI Scotland have said it could put companies out of business. After the enormous challenges of equal pay legislation, the new monster coming over the hill is holiday pay.

Things have moved at enormous pace this year since May, when the European Court of Justice (ECJ) ruled in the case of Lock v British Gas Trading Ltd.(Case C-539/12)

Lock was a sales consultant and commission made up approximately 60 per cent of his total remuneration. He brought a case based on the premise that his holiday pay was calculated on his basic salary, not including commission, and that he suffered financial disadvantage as a resuylt. His legal team argued that Lock, and others like him, would be discouraged from taking up their full holiday entitlement if their income would be so much lower during that holiday. 

The UK Employment Tribunal had referred the case to the ECJ, which found in favour of Lock – opening the door for many thousands of workers whose total pay was heavily reliant on commission, including sectors like financial services, insurance and sales.  

As the Working Time Regulations (1998) were originally implemented to bring the UK in line with European law, it appeared that the UK Government would have to amend the regulations to bring them in line with the new judgement, or rely on the Courts and Tribunals to “interpret” the issue on a case by case issue. 

However, things got more complicated when further cases came to the UK Employment Tribunal, adding overtime into the mix. If commission was taken into account when it came to calculating holiday pay, what about those who carried out regular overtime? And what about travel allowances or performance bonuses?  

They argued that if commission was in, overtime had to be in too – and the Employment Tribunal appeared to follow that thinking when it ruled in favour of the workers, including the case of Fulton v BEAR  Scotland, the roads maintenance organisation.  

The employers appealed and everyone is now eagerly awaiting the decision of the Employment Appeals Tribunal which was reserved in August. . I think that UK legislation will have to be changed, but even that would be far from the end of the story.  

This is because claims for additional holiday pay based on overtime and commission could in theory be backdated to 1998, when the Working Time Regulations were introduced in the UK. Obviously, this really could be a nightmare for some employers – and for the UK Government.  

One school of thought is that employers might argue that they are not liable for any backdated payments as it is a failure on the part of the UK Government to comply with European law. If the Courts say it is impossible to reconcile the UK Working re Regulations with the ECJ decision, then employers could suggest the Government picks up the tab. 

It is difficult to see the Government accepting this, but it  could be politically explosive against a backdrop of the rise of UKIP and David Cameron’s continuing hardball game with the European Union. 

I can’t really see this happening. There will instead have to be some kind of move towards legislative changes – and meanwhile that will leave the way forward for potentially hundreds of thousands of employees who believe they can submit a claim for backdated holiday pay based on commission or overtime.  

The main method is a statutory claim through the Employment Tribunal, which would mean having to lodge the  claim within three months of the last ‘underpayment’ by the employer.   

The second option could be  to recover unpaid sums under breach of contract through the courts, although many believe that holiday pay is not unpaid wages and cannot be recovered this way.  

The big issue is how many years backdated payments can be claimed?  Many think the civil limits of 5 years in Scotland or 6 years in England and Wales may be followed, but it is still unclear.  

Some trade unions are already preparing ‘class action’-style cases onbehalf of large numbers of employees. In that sense, the cat is out of the bag and employers have to come up with tactics to address the issue.  

This might mean agreeing a new method  of agreeing holiday pay going forward, while making a one-off payment, agreed with the employer, to cover what has gone before – and following a standard approach for all historic cases.

Large employers are already wise to the implications; some are at advance stages of negotiations with unions or employee representative organisations and are making provision for the likely ruling in favour of employees. 

Very small firms are likely to be able to come to some agreement with employees, as it is probably in both sides’ interests to do so, but firms with somewhere between 20 and 200 staff might find themselves in a real squeeze. They might not have the resources to make large payments, but not doing so could leave them with very unhappy employees.

There are many people awaiting the next judgment anxiously – and in my view, the conclusion that it is “another HR nightmare” is very hard to resist.

If you are an Employer or an Employee wanting more advice on Holiday Pay, please contact Robert Holland on 0131 200 1242 or email him at robert.holland@balfour-manson.co.uk


This article appeared in the Scotsman 27th October 2014