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Law for Business

Knowhow - guidance - precedents

12 MAY 2015

The trouble with holiday pay

The trouble with holiday pay
Charlotte Williams
Solicitor, Veale Wasbrough Vizards

Over the past few years there have been a number of cases regarding holiday pay which could cause alarm to employers. In particular the calculation of holiday pay has been subject to review and challenge and these judgments could have serious consequences for all family businesses.

What are employees entitled to?

The right to paid annual leave derives from the Working Time Directive (at European level) and the Working Time Regulations 1998 (at domestic level). One of the fundamental purposes of the Directive is to protect the health and safety of workers.

In the UK, all workers are entitled to 5.6 weeks of annual leave per year and to a 'week's pay' for each week of leave.

What is a 'week's pay?

According to case law, 'a week's pay' is a worker's normal pay, which means that a worker should be not put in a worse position as a result of taking annual leave or is not deterred from doing so.

However, there is conflicting case law about whether a worker's commission should be included in holiday pay.

In the recent case of British Gas v Lock, the European Court of Justice ruled that holiday pay should include commission where it is linked to tasks that the worker is required to perform.

In this case, Mr Lock's commission often represented 60% of his total salary. When he was on annual leave he received his basic salary plus any accrued commission and so, on the face of it, he did not appear to be any worse off than if he had not taken annual leave. However, his leave did have a knock-on effect as he could not make any new sales whilst he was away and so he brought a claim against his employer for outstanding holiday pay.

We await final confirmation of the decision from the employment tribunal.

How are family businesses vulnerable?

Family businesses often rely on the good will of their employees more than others. Employment arrangements mat also be on a more informal basis (sometimes without robust employment contracts in place), particularly if employees are also family members, or have been with the family business for a long period of time. Family businesses often experience lower staff turnover than their non-family counterparts and so could fall foul of employment legislation, particularly if relationships turn sour.

The cost of an employee's successful claim for backdated holiday pay could be crippling, particularly for smaller employers. It is not always clear how far back holiday pay can be claimed, where there have been a series of deductions, claims could date back to 1998.

What can family businesses do to reduce their exposure?

Family businesses should evaluate their holiday pay arrangements and assess whether calculations need to be varied in include variable payments such as commission. If the arrangements could deter employees from taking annual leave, they are likely to fall foul of the legislation.
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