Overtime, commission & holiday pay
With two bank holidays under our belts this month, and the long summer break on the horizon, holidays will be on the minds of many – although, if you are applying working time rules in the workplace, the thought of holidays may have you reaching for paracetamol rather than suntan lotion. Julian Hoskins looks at the latest developments in respect of how holiday pay should be calculated for employees who are paid overtime and commission – should what those employees are paid while on holiday include their overtime or commission rates…?
Subject to certain exceptions, workers have a right to a minimum of 5.6 weeks' paid annual leave under the Working Time Directive, implemented in the UK by the Working Time Regulations 1998 (WTR).
In calculating holiday pay, the WTR require employers to identify a worker's "normal working hours" and a "weeks' pay". This will include a worker's basic wages, plus any guaranteed (obligatory) overtime. Where the worker has normal working hours but overtime or additional hours may be worked, statutory holiday pay is calculated with reference to the contractual hours only. If a worker has normal working hours and commission counts as payment for normal working hours, that must also be taken into account.
However, if a worker has normal working hours and pay varies according to some criterion other than amount of work done - such as whether that work has generated income for the employer – then commission payments will not be taken into account.
Where an employee has no normal working hours a 'week's pay' is simply calculated as an average of all the sums earned in the previous 12 working weeks. This would include any overtime payments and commission.
Back in 2011, the European case of Williams v British Airways plc established that holiday pay should be based on a worker's "normal remuneration", i.e. any pay "intrinsically linked to performance of tasks under the worker's contract". In the Williams case, 'normal remuneration' was determined to include contractual supplemental payments on top of basic pay. This had the knock-on effect of creating doubt about whether the UK's Working Time Regulations were inconsistent with European law, and whether overtime should, in fact, be included as part of "normal remuneration" when calculating holiday pay.
In a separate development, last week the Court of Justice of the European Union (CJEU) handed down its decision in Lock v British Gas on whether commission from sales should be included in holiday pay. The facts, in brief, are that Mr Lock earns a basic salary and commission, both paid monthly. The commission element of his pay is paid some weeks or months after the conclusion of the sale to which it relates.
In its decision, the CJEU noted that, during annual leave, a worker must receive their normal remuneration and this must be comparable to what they would earn during periods of work. According to British Gas, that objective was achieved since Mr Lock received, during his annual leave, a salary including his basic salary, and also the commission resulting from sales achieved during previous weeks. The CJEU rejected that analysis; it took the view that, notwithstanding the remuneration received by Mr Lock during his annual leave, he did suffer a financial disadvantage – albeit deferred – and this may deter him from taking annual leave. The CJEU felt that this was particularly likely in a situation such as Mr Lock’s, in which commission represents, on average, over 60% of his earnings.
As regards the commission received by Mr Lock, the CJEU noted that that it is directly linked to his work. Consequently, there is an intrinsic link between the commission received each month by Mr Lock and the performance of the tasks he is required to carry out under his contract of employment. The CJEU therefore decided that such commission must be taken into account in the calculation of Mr Lock's holiday pay.
The uncertainty created by the Williams case has manifested itself in three recent Employment Tribunal decisions.
The cases of Neal and Fulton were joined together and will be heard by the Employment Appeal Tribunal on 30 and 31 July 2014.
Although the overtime cases outlined above are only first instance decisions and, therefore, it would be open to other tribunals to reach different conclusions, it appears that employment tribunals are minded to find that holiday pay should include overtime payments. Weight will be added to this analysis by last week's decision in Lock. We understand that a large number of employment tribunal claims have been stayed pending the outcome of the appeals in Neal and Fulton and, in the meantime, the correct position in respect of overtime remains uncertain.
In relation to commission and overtime payment, it will now be
for the UK employment tribunal to make its decision based on the
guidance from the CJEU in Lock. It is likely that
they will look at an average reference period in order to assess Mr
Lock's entitlement to holiday pay, to include his average income
from commission. If your employees are remunerated under
similar arrangements, you would be well advised to review those
arrangements to check whether they are consistent with the CJEU's
decision and seek advice if necessary