Background

The European Working Time Directive, implemented into UK law by the Working Time Regulations 1998, is designed to protect the health and safety of employees by ensuring that they have a statutory entitlement to a minimum amount of rest and recuperation. The entitlement to paid annual leave forms an integral part of this protection. 

When on leave employees are entitled to a week’s pay for each week of leave. This seems straightforward, but as the case law on this issue has developed it has become apparent that ‘pay’ is not limited to the employee’s basic salary.

In this update, we set out a summary of how the scope of ‘holiday pay’ has been expanded both in domestic judgments and those of the Court of Justice of the European Union, explore the underlying principle that has driven this expansion and give an indication of the direction we consider this issue is likely to take in future.

Holiday Pay

The Court of Justice of the European Union has made it clear that an employee must, while on annual leave, receive their ‘normal remuneration’ and that this includes any payments that are ‘intrinsically linked’ to the performance of the tasks which they are required to carry out under their contract of employment, including any commission and overtime payments to which they are contractually entitled.

Lock v British Gas Trading Ltd on Commission Payments

In this case, an energy sales consultant went on annual leave during which he was paid his basic salary plus commission for sales that completed during that period. This resulted in him receiving a reduced income as he had not generated commission when on holiday. He brought a claim before an Employment Tribunal arguing that this reduced income amounted to a breach of the Working Time Regulations. The Tribunal noted that under the Regulations an employee who has normal working hours is not entitled to a sum in respect of commission as part of holiday pay, but referred the case to the Court of Justice of the European Union.

The Court of Justice of the European Union held that, if an employee’s remuneration includes a contractual entitlement to a commission payment based on sales achieved, under the Directive such payments must be included when calculating normal remuneration.

The case has now gone back to the Employment Tribunal to determine whether it is able to interpret the domestic legislation in line with the Court of Justice’s decision and, if so, how the employee’s holiday pay should be calculated.

Overtime Pay, Allowances and Bonus Payments

There have been a number of Employment Tribunal decisions that have, in line with the guidance given by the Court of Justice of the European Union in the Lock case, ruled that overtime pay, allowances and bonus payments that are ‘intrinsically linked’ to the performance of the tasks which the employee is required to carry out under their contract of employment, must be included when calculating the holiday pay to which they are entitled.

Two of the Tribunal decisions, Wood v Hertel (UK) Ltd and Fulton v Bear Scotland Ltd, were considered by the Employment Appeal Tribunal on appeal this summer. The EAT’s decision on these cases is awaited.

Conclusions

Returning to the principle that underpins the entitlement to annual leave, were commission payments, overtime pay, stand-by allowances and similar payments not to be included in the calculation of what amounts to normal remuneration for the purposes of determining what payment the employee should receive during their annual leave, the employee is likely to be deterred from taking the leave to which they are entitled. This would go contrary to the Directive’s intended purpose.

Therefore, though this area of the law is still evolving, it is likely that payments that are intrinsically linked to the performance of the tasks which the employee is required to carry out under their contract of employment, should be paid during any annual leave. In addition, any other measures that act as a disincentive to employees taking their annual leave entitlement (especially the four week minimum that is required under the Directive), such as a performance bonus which is likely to be reduced by any period of absence on holiday, are also likely to be subject to challenge in the future.