A new ruling by the Court of Justice of the European Union on the treatment of holiday pay may have implications for the administration of pension schemes.

Last week, in Lock v British Gas Trading, the Court ruled that an employee’s holiday pay should include commission and other elements of variable pay. The Court held that employees who receive variable pay which is “intrinsically linked to their contract of employment” including overtime, shift allowances and offshore allowances should be paid basic salary plus contractual variable pay during periods of annual leave. If variable pay was not included and workers were paid significantly less during a period of annual leave then low pay could deter employees from actually taking their holidays.

The decision has potential knock-on consequences for pension schemes. If scheme rules define pensionable earnings by reference to elements of variable pay, or provide that all pay is pensionable, incorrect figures may have been used for calculation of contributions and benefits.

Employers who pay these types of variable remuneration will need to consider whether they are affected by the decision and check what the implications may be for their pension schemes.  In principle, employees could bring deductions from wages claims which would enable them to recover sums going back to 1998, when the Working Time Regulations were introduced. However, the Court said that the precise method of calculating an employee’s entitlement should be determined by national law, and it remains to be seen what approach an employment tribunal would take.

Trustees of pension schemes which include variable or total pay in the calculation of pension rights may also wish to seek further information from employers in order to establish whether there are any implications for their scheme.

It is worth noting that additional UK cases dealing with other aspects of variable pay, including non-contractual overtime, are due to be heard by the Employment Appeal Tribunal later in 2014. These, too, could have an impact on the calculation of pension entitlements.

The ruling can be found here.