The Advocate General's opinion in Z.J.R Lock v British Gas Trading Ltd & Others sheds some light on how to calculate the holiday pay of an employee whose remuneration comprises basic pay and other elements.

Facts of the case

The employee's remuneration was comprised of basic pay and commission. The commission was based on business won and generally accounted for around 60% of his remuneration. British Gas only paid basic pay in respect of periods of annual leave. Clearly an employee cannot generate business whilst on annual leave. The Leicester Employment Tribunal made a reference to the European Court of Justice.

The Advocate General is of the opinion that commission should be included when calculating holiday pay. In most cases, the ECJ goes on to follow the opinion of the Advocate General.

Key principles

The Advocate General relied heavily on the previous ECJ judgment of British Airways plc v Williams and Others which considered what allowances should be included when calculating the holiday pay of pilots. The upshot of these decisions is that any allowances or payments that are intrinsically linked to the worker's job and have a degree of permanence should be taken into account when calculating holiday pay. A payment in respect of expenses does not need to be included in the calculation as long as it is genuinely and exclusively intended to cover costs.

It should be noted that the ECJ and Advocate General's rulings apply only to annual leave under the Working Time Directive, which is four weeks. It may be possible for an employer to apply different rules to "working time" holidays and annual leave in excess of four weeks.

The rules apply to workers (i.e. those who provide a personal service to the organisation) as well as employees.

What are the potential implications?

A lot of employers are likely to be caught out by the generous interpretation of the law by the ECJ. The financial consequences could be significant, especially given the likelihood that workers could seek arrears of pay going back several years. John Lewis recently paid out £40 million to employees as a result of the miscalculation of holiday pay.

What should you do?

In light of these cases, you should carry out a review of how the organisation calculates holiday pay. If there are any regular payments or allowances that are not taken into account when calculating holiday pay, consideration should be given to whether they are "intrinsically linked" to the performance of the employee's tasks and whether they have a degree of permanence. We can assist you with that. If the result of the analysis identifies an exposure to risk then we can assist you in developing a strategy for limiting your organisation's liability.

These cases join a large list of other high profile holiday pay cases that have occurred in recent years. The relationship between holiday pay and sickness absence is another "holiday hotspot". A full holiday pay audit is the best way of identifying the organisation's exposure to risk. Only once the risk is known can a strategy for limiting liability be developed. Holiday pay audits are a service we offer.

Holiday pay could well be the next project for "no win no fee" lawyers. Don't be caught out! Deal with this matter sooner rather than later.