Overtime, commission & holiday pay

Overtime, commission & holiday pay

28/05/2014

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…? 

Background

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.

Guidance from Europe

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.

Uncertainty over overtime

The uncertainty created by the Williams case has manifested itself in three recent Employment Tribunal decisions.

  • In Neal v Freightliner Ltd, Mr Neal was required to work a 35 hour week made up of seven hour shifts (determined by a roster system).  His contract also stated that he may have to work overtime when "necessary".  Mr Neal regularly worked up to nine hours a day and sometimes up to 12 hours to cover for his colleagues.  The Employment Judge held that, in light of Williams, a worker's overtime payments had to be taken into account when calculating holiday pay. The Judge decided that the hours worked by Mr Neal in addition to his contractual seven hours were "intrinsically linked" to his performance of his role, and it was irrelevant whether the overtime was voluntary or not.
  • Similarly, in Fulton v Bear Scotland Ltd, the Employment Judge held that a worker who worked regular overtime as a matter of course was entitled to have that overtime reflected in his holiday pay.  It was also decided that standby and emergency call-out duties had to be taken into account. As in Williams, these were considered to be "intrinsically linked" to performance of tasks to be carried out under the contract.

The cases of Neal and Fulton were joined together and will be heard by the Employment Appeal Tribunal on 30 and 31 July 2014. 

  • An employment judge took a different view in Elms v Balfour Beatty Utilities Solutions Ltd. The judge held that a worker's holiday pay could be calculated with reference to his basic pay for his 40 "normal working hours" a week. Overtime payments, standby payments and bonus payments did not need to be taken into account. In the judge's view, it was not possible to interpret the WTR 1998 to give effect to Williams. If it is necessary to rectify a defect in the WTR 1998, this was "surely a matter for Parliament and not for the courts or tribunals". We understand that this case has now been settled.

What next?

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

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