Last month’s decision of the European Court of Justice, following last year’s Supreme Court decision involving airline pilots, will result in higher holiday pay bills for many employers.

Overview

Last year the Supreme Court, in a decision involving BA pilots, signalled the way for a significant re-think of the way statutory holiday pay should be calculated for many categories of workers.  Under the Working Time Regulations as currently drafted, holiday pay is normally pegged to an employee’s basic pay. The BA pilots’ litigation, which involved a reference to the European Court of Justice, established the principle that their holiday pay should include all elements of remuneration which are “intrinsic” to the performance of the job.  The BA litigation was about the aviation sector. It was not until last month that we had the first decision from the ECJ to apply the same analysis to the Working Time Directive, the EU legislation which lays down the minimum entitlement to paid holiday for the vast majority of European workers. In this latest decision, Lock v British Gas, the ECJ makes it clear that holiday pay must reflect typical commission earnings as well as basic pay.  Similar reasoning would also apply to other instances where a worker receives a lower rate of holiday pay than his or her typical weekly earnings.

The British Gas decision

This decision results from a reference from an employment tribunal in 2012 in a case brought by Mr Lock. He had complained about his employer’s failure to reflect his commission earnings in the calculation of his holiday pay.  British Gas argued that Mr Lock was entitled only to his basic salary while on holiday, even though the commission he received typically represented over 60 per cent of his total earnings. That stance reflects the provisions of the Employment Rights Act defining a week’s pay which also apply to holiday pay under the Working Time Regulations. British Gas relied on a decision of the Court of Appeal which indicated that typical result-based sales commission is not an example of pay varying with the amount of work done. That meant that the averaging provisions for variable pay did not apply and that was why it based his holiday pay on basic pay only.  The ECJ said that this interpretation of the Working Time Regulations is not compatible with the Directive, since it resulted in Mr Lock being deprived of an element of pay which was “intrinsic” to his job when his holiday pay was calculated. The case will now return to the tribunal for it to decide whether the Regulations can be re-interpreted in a way which conforms the Directive. Based on the approach that tribunals have been encouraged to take in other areas of employment law, this should not prove too difficult in this instance, since it is arguable that the relevant statutory wording is open to more than one interpretation.

Other decisions in the pipeline

It is not only Mr Lock who has lost holiday pay as a result of the relatively strict rules laid down for calculating a week’s pay. Many employees working significant amounts of overtime have also taken home holiday pay that is lower than their normal earnings. Typically this has been because of the orthodox view that a week’s pay for workers with normal working hours does not include voluntary overtime. There is also a rule to the effect that even if overtime is contractual and so included in calculation, any enhanced overtime rates should be disregarded.  These issues will be explored in two appeals due to be heard by the Employment Appeal Tribunal in late July. Given that there is a Court of Appeal decision which goes against more generous interpretation of the Directive now favoured by the ECJ, it may be that further appeals will be necessary before the matter is finally settled.

Implications

We will need to wait at least until the above decisions of the Employment Appeal Tribunal to know where things stand. However it is already clear that it is only a matter of time before the principles now established at ECJ level are translated into our domestic law, either by further amendments to the Working Time Regulations or through creative judicial interpretation of the current provisions. In the meantime workers in the public sector will be able to rely directly on the Working Time Directive to bring claims against their employers.

For the time being these are the key points to note:

  • Claims for underpaid holiday pay can in principle go back to the earlier of the start of the employment relationship or October 1998 (the date the Working Time Regulations took effect).
  • To ensure compliance with the Directive, workers will need to be paid their average remuneration during the four week holiday period guaranteed by the Directive.
  • Allowances which are paid to reimburse the worker for expenses incurred in the course of their duties need not be included.
  • The correct averaging period is not certain, but using the same 12 week reference period as is currently stipulated for workers without normal working hours is likely to be acceptable.
  • There is no legal obligation to change the arrangements for any holiday entitlement (whether contractual or statutory) over the four week minimum entitlement. However employers may find the logistical and industrial relations implications of a two-tier holiday pay system unattractive.