“Normal remuneration”. These two words, contained in European law uttered by a judge in the European Court of Justice, have caused the biggest shake up in holiday pay since the introduction of paid holiday entitlement in the UK.
When the UK introduced the Working Time Regulations in 1998, they stated that a worker should receive a “week's pay” during a period of annual leave. This has always been slightly different to the phrase of “normal remuneration” used by European courts. The matter came to a head last year when various cases were brought before the courts from workers claiming that, if annual leave should indeed be “normal remuneration”, then items such as overtime and commission should also be included.
In the case of Bear Scotland v Fulton, the Employment Appeal Tribunal confirmed that overtime should form part of a worker's wage during holiday entitlement.
As with most areas of employment law, it is not as straight forward as an automatic entitlement. A worker will only be entitled to be paid for overtime if they are required to carry out the overtime as part of their contract, or if it is “non-guaranteed overtime”. Non-guaranteed overtime is described as overtime that the employer is not obliged to offer but the worker is obliged to work if offered.
At this stage there is no requirement for purely voluntary overtime to be paid during holiday pay. Don't bet against this requirement being law, however.
In the recent case of Lock v British Gas it was ruled that commission should also be payable to workers during annual leave. This case continued the trend on implementing the “normal remuneration” requirement from the European Courts.
Does overtime/commission need to be paid for all holidays taken?
This is where employers will need to make a business decision. Under European law workers are entitled to 20 days holiday per year. The UK went further and provided workers with 28 days holiday per year.
As the interpretation of normal remuneration is taken from the European law, the requirement to pay commission and overtime relates only to the 20 days holiday provided for by European law. There is, therefore, no requirement for employers in the UK to pay employees overtime and/or commission on the extra 8 days holiday provided under UK law or more generous contracted holiday.
In reality, this may cause an administrative burden on employers and it may be easier for employers to pay overtime/commission for the entire 28 days.
What is the calculation period?
This question was left unanswered by the courts.
The European court decision in Lock stated that each national court needs to calculate the average over a reference period "which is considered to be representative". Commentary on this topic suggests that overtime/commission should therefore be calculated over the 12 week period prior to an employee’s holiday. There is an argument, however, for employers in areas such as retail, who may receive a higher commission payment or increased overtime over the festive period or summer to argue that it is more appropriate )and attractive for employers). to be 12 months instead of 12 weeks.
What about back pay?
Any claim by a worker for unpaid overtime/commission would be brought as an unlawful deduction of wages claim in the Employment Tribunal. The Government has recently introduced new legislation which means that claims issued from 1st July 2015 will be limited to a maximum period of two years' back pay from the date any claim is lodged.
What also may come as a relief to employers is that any period where there is a three month break between periods of annual leave will break the chain and any such claims should not go back beyond that date.
Whilst the new rules regarding holiday payments will no doubt create a higher financial liability for employers, we were pleased to see that employers were provided with a definitive answer with regards to such liability. However, this certainty has eroded as we publish this article because British Gas has appealed against the decision in respect of commission. This battle looks like it will be ongoing for some time yet, with an appeal not likely to be heard until the tail end of 2015. In the interim we recommend you take legal advice if you are faced with enquiries regarding commission payments.
How can you find out more?
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.