The True Cost of Holiday Pay

Written by Paul Windsor on 15 October 2015

A recent change in the law relating to the calculation of holiday pay for businesses that pay a substantial proportion of variable compensation (such as commission or regular overtime) to their employees, has started to have a significant impact on staff costs.

With pressure on employers to increase wages in the post recessionary period, as well as the forthcoming introduction of the National Living Wage to take up the slack from the reduction in tax credits, there is a real sign that profit margins across a number of industry sectors are being seriously eroded.

A ruling by the European Court of Justice (ECJ) in the case of Lock v British Gas, has resulted in an Employment Tribunal decision to amend the working time regulations to conform with the European judgement and this was published in March 2015.

Essentially, the problem arises because a worker does not generate any commission during their period of holiday and as a consequence, the worker is paid reduced remuneration comprising only his basic salary upon his return to work after annual leave. The result is that the adverse financial impact may deter the worker from actually taking annual leave.

Unhelpfully, the ECJ sidestepped a specific question it was asked about what principles were to be adopted by Member States when calculating the sum. The difficulty is working out what is payable to the worker, i.e. what the worker would or might have earned if he had not taken annual leave.

It seems that this judgement was influenced by the earlier Bear Scotland case, which related to the inclusion of overtime payments in holiday pay calculations. British Gas are currently appealing the judgement on the grounds that overtime and commission are very different things!

The conclusion if you are a business that pays substantial commission payments, is that you should now take account of the commission when calculating holiday pay. It falls under the definition of 'pay that varies with the amount of work done', however,  there is currently no legally binding guidance on exactly how the calculation of holiday pay should be made.