Employment Law Update

Update summarises our recent client seminar on the major new holiday pay case of Lock v British Gas.

What is the case about?

The European Court of Justice (“ECJ”) held that holiday pay under the Working Time Directive cannot be calculated based on basic salary alone where a worker’s remuneration includes commission determined with reference to sales achieved. This is because if the commission is not taken into account, the worker will be placed at a financial disadvantage when taking statutory annual leave, since no commission will be generated during their holiday period. In such circumstances, the ECJ considered that a worker might be discouraged from taking holiday, which would be contrary to the Directive’s purpose.

Why is it so important?

Although the actual case of Lock only dealt with commission, the underlying rationale of the ECJ judgment is of greater significance – in its words “remuneration paid in respect of annual leave must, in principle, be determined in such a way as to correspond to the normal remuneration received by the worker”.

The impact of this judgment is expected to be huge as many workers get far more than basic pay (e.g. overtime, bonuses, standby payments) and historically contracts have said that is the only element that holiday pay needs to cover.

The risk will be most acute in respect of long-serving employees who could potentially be owed years of back pay in respect of the underpayments.

Given the potential scale of the liabilities facing some businesses it therefore seems probable that there will eventually be significant numbers of holiday pay claims over this issue. For instance, Caspar Glyn QC of Cloisters has described the issue as being the “future area of litigation for the next few years”.

What should I do?

If you are an employer with employees who receive supplementary payments such as commission and overtime we would strongly recommend that you get in touch with your usual contact at Joelson Wilson in order to discuss to what extent this might be an issue for your business.

Important initial steps to take will be as follows:

  • Conduct an audit of payroll arrangements in order to check if current holiday pay arrangements are compliant.
  • If there is a compliance issue then make sure that payroll arrangements are updated so that in future holiday pay will include a sum in respect of commission, overtime etc. This will require a “reference period” that looks back at the average commission usually earned by each employee so that a representative sum can be incorporated into the holiday pay amount.
  • Efforts should be made to establish the scale of the potential historic liability that the employer is facing. This will require analysing how far back any underpayments go in respect of each employee and calculating the total quantum. An accounting provision may need to be made in respect of this potential liability.
  • The employer will need to consider if and how the issue should be addressed with employees. It may be best to transparently inform employees of the mistake and how things will be addressed going forward or it may be preferable to take a more covert approach to head off the risks of litigation.
  • The most important thing is that steps are taken quickly and an action plan put in place. Rules on the time limits for claims mean that correcting payroll arrangements will reduce the risk that employees can make claims stretching back many years and an early assessment of the situation should reduce the extent of any future liability.

Need to know more? Ask us.

“Joelson Wilson LLP’s service is exceptional, detailed and professional”
Legal 500 2011

For information/advice, please contact our Employment and Immigration Team:

Adam Taylor ajt@joelsonwilson.com
Jennifer Maxwell-Harris jmh@joelsonwilson.com

Joelson Wilson LLP
30 Portland Place, Lon

This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.