Employment Appeal Tribunal Judgment – Holiday Pay

6 November 2014

The recent Employment Appeal Tribunal (EAT) judgment delivered on Tuesday, 4 November 2014, in relation to holiday pay has been much reported and its ramifications greatly speculated.  A significant concern for a number of businesses, and specifically firms in the city, is that the judgment will apply to bonuses and commission payments which will see companies paying employees large sums (for holiday pay) in commission/bonus payments that have not been earned.

The landmark judgment in this case, Bear Scotland Ltd and others v Fulton and others; Hertel (UK) Ltd v Woods and others; Amec Group Ltd v Law and others, addresses whether workers are entitled to holiday pay which reflects normally received supplementary pay, such as overtime payments.  In his judgment, Mr. Justice Langstaff concluded that Article 7 of the Working Time Directive has the effect that normal pay for the purposes of calculating holiday pay included overtime pay if this was normally received by the employee.

Thus, a clear direction that holiday pay is not to be restricted solely to basic pay, but also to additional and variable pay normally received.  This ruling poses a threat to businesses that pay staff commission or bonuses based on the revenue that the employee creates.  Seemingly, businesses may now be required to pay similar sums of remuneration to staff for periods of holiday, where they are not generating any revenue for the company, as they would when rewarding an employee for commissions actually earned.  The obvious problem with this is that these additional payments when normally received are based on actual income the employee has generated for the company; the employee is receiving a slice of the pie they have baked, so to speak.  If entitled to commensurate remuneration for holiday periods, the business is forced to reward the employee for revenue which has not been created – the additional holiday payments will therefore have to be borne by the company.

Another significant element to Mr. Justice Langstaff’s judgment was his finding on whether the failure to include overtime pay in holiday pay amounted to a series of unlawful deductions so that backdated claims could be made.  Langstaff concluded in this respect that a series of deductions would be broken if any two instances were separated by three months or more (three months less one day being the time limit within which unauthorised deductions from wages must be claimed).  This ruling somewhat superficially appears to reduce the risk of a flood of backdated claims for deduction from pay; however in practice few are likely to fall foul of the time limit.  It is undoubtedly uncommon for employees to take annual leave at intervals exceeding three months and commission payments are often paid monthly or quarterly.

A decision in relation to commission payments specifically is due in February and permission to appeal the EAT decision in these cases was allowed.  It will therefore be some time before the consequences of the judgment and how it must be applied is clear.  For now, however, firms should take legal advice on how to limit the effect of the judgment on their business by reviewing their bonus and commission structures.

If you have any questions and would like to talk to an employment lawyer about the consequences of this judgment, please call 0203 178 5361. Alternatively, you can contact us by clicking here.