In 2012 the Court of Justice of the European Union (CJEU) and subsequent Supreme Court judgments in British Airways plc v Williams established that a worker must be no worse off financially during annual leave than if he / she had continued working. This established that supplements paid for performing a role or overtime which is required (but which is not guaranteed) would be included when calculating holiday pay. As a result, Williams has led to other cases outside the aviation sector exploring the limits of this ruling principally because the EU Working Time Directive does not specify which elements of pay should be included when calculating statutory holiday pay.

A trend is developing

In one case (Neal) an employment tribunal has decided that even voluntary overtime should be included when calculating holiday pay. The Tribunal in Neal also decided that a worker could potentially claim for several years of underpayments on the basis that each failure to pay proper holiday pay formed part of an unbroken series of unlawful deductions from wages. 

Adding to the trend in this area is Lock v British Gas Trading Limited. The CJEU ruled that EU law requires a worker's statutory holiday pay to take commission into account. This is a game-changer. If a worker earns commission, the calculation of the holiday pay must include the commission already earned by the worker before the holiday period as well as commission that might be earned by the worker during the holiday period itself. 

November 2014 saw the Employment Appeal Tribunal judgment in Bear Scotland and others on the important issue of whether overtime must be included in holiday pay.  This judgment was widely reported in the media and individuals will soon be assessing if they stand to benefit. If your workforce has not already raised the issue of holiday pay, they are likely to do so now. 

Assess your risk

Regretfully, holiday pay has become a real minefield for employers in the technology sector, in particular, given the common use of commission and performance bonus schemes. We recommend that you carefully consider the following to assess your potential exposure to claims:

  • Conduct an audit of the different payments (eg commission, voluntary overtime, non-voluntary overtime, shift allowances and other premiums in pay) paid to workers in all parts of the UK and European business.
  • Check contracts of employment, contracts of engagement and staff handbooks to ensure that they correctly record how holiday pay is currently calculated.
  • Carry out an audit of your workforce demographic to ascertain for how long potential liabilities might go back. Exposure to claims for back pay should also be considered so that financial provision can be made where appropriate.
  • For staff who earn commission or bonus, this may be a good time to review your scheme rules, particularly in relation to how commission would accrue and is paid out (eg weekly, monthly, quarterly, bi-annually or yearly). The timing of the payment will decide if it is within the reference period that will need to be used to calculate a week's pay.
  • The Bear Scotland and others ruling only affects holiday entitlement derived from the Working Time Directive (‘Euroleave’) – that is, four weeks holiday a year. Be mindful that in Bear Scotland and others the EAT decided that employees can only claim back pay to the extent that they can show a series of underpaid Euroleave with no gap of more than three months between underpayments.

Proceed with caution

Employers should ensure a “joined up” approach at board level, with finance and HR working together to ascertain the scale of past and future liabilities.

Finally, once you gather the above information, that knowledge will be disclosable in any employment litigation. Involving lawyers in the risk assessment makes any information gathered legally privileged.