Questions remain over reference periods and rolled-up pay
The most recent judgment in the case Lock v British Gas Trading was eagerly awaited as it was hoped it would provide definitive guidance on how holiday pay should be calculated. Unfortunately, this is not quite the case.
The Court of Justice of the European Union (CJEU) had already decided in the case that holiday pay must reflect normal pay and cannot be limited to basic salary for workers who earn sales commission. However, when the case returned to the employment tribunal, there were two further issues to consider:
- whether words could be added to the UK’s Working Time Regulations 1998 in order to implement the European court’s decision
- how holiday pay should be calculated in the Lock case.
Tribunal
Unsurprisingly the employment tribunal chose not to reinvent the wheel on the first issue and followed the Employment Appeal Tribunal’s previous decision. The tribunal said that words can be added to the regulations to provide that commission should be included in holiday pay for four weeks’ leave each year (four weeks being the minimum holiday requirement under European law, although the UK entitlement is higher). However, it postponed its decision on the second issue to a hearing later this year. Employers will, therefore, need to wait for clarity on how to calculate holiday pay, including what the correct reference period is, how schemes that roll-up holiday pay will be treated, and the value of Lock’s claim.
The employment tribunal did, however, give an indication of where it may go on reference periods, saying that Lock should be treated the same as piece workers (those paid a fixed rate for each item they produce) under the regulations. His holiday pay should, therefore, be an average of his actual pay including ‘commission and similar payments’. Under the regulations, a 12-week reference period is used to calculate a piece worker’s average pay, so this appears to endorse the approach suggested by the European Advocate General in the Lock case, in preference to the European court’s preference for a “representative reference period”.
While a 12-week reference period could be an acceptable solution, it is not guaranteed to work in every case, particularly if a worker’s payments vary significantly throughout the year. Assessing what reference period is representative on an individual basis is likely to be fairer. We will need to wait and see whether the tribunal agrees in the second part of the judgment. The tribunal also made it clear that its decision only dealt with commission. It did not comment on whether other forms of variable pay (such as discretionary bonuses) should be included in holiday pay. Following the EAT decision, non-guaranteed overtime and the taxable element of travel allowances should also be included. Other similar payments will be covered if they are part of ‘normal pay’.
Comment
The second part of the judgment will hopefully give further guidance on how to calculate holiday. However, as a first instance decision, other tribunals are not bound to follow it so it should not significantly affect employer’s strategies for dealing with holiday pay.
It is clear that commission should be included in holiday pay, but uncertainty persists over the correct reference period and the impact of rolled up holiday pay in commission schemes, so calculating holiday pay remains difficult. Altering holiday pay calculations now could mean over- or under-paying, but paying nothing for commission will mean that an employer’s full liability will continue to accrue.
Many employers are taking a pragmatic approach and are including variable pay averaged over 12 months, or at least setting aside money to meet this liability. The decision on whether to pay now or wait should be based on an assessment of an organisation’s risk of claims and potential liability from underpayments in the past and the future. An organisation’s strategy will ultimately depend on its attitude to risk, its ability to pay past and future liabilities, and payments already made.
Hester Jewitt is a senior associate at Penningtons Manches
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