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All Change For Holiday Pay

This will be of interest to you if you have staff who don’t have regular earnings.

The position for staff with irregular earnings (because their hours change regularly or because they earn commission) has always been clear in respect of their notice pay and redundancy pay. The advice has been that staff who are dismissed or leave are paid an average of their last 12 weeks earnings. Similarly when staff take maternity leave the first 6 weeks is paid at 90% of their normal rate of pay.

Normal pay includes everything received in the reference period including sick pay, overtime payments, bonus payments, arrears of pay or holiday pay. I have advised my clients for some time that I couldn’t see any difference in the case of holiday pay, but we have awaited the test case. We now have the advice from the test case. It’s bad news for employers who don’t pay average commission earnings in holiday pay.

The Law

The working time directive was introduced in 1998 and for the first time guaranteed staff paid holidays. The number of days has risen steadily and the current minimum is 28 days for someone working a 5 day week. It always seemed a little unusual that the holidays were introduced to ensure staff took a break from work, ie for Health and safety reasons. The argument was that if staff weren’t paid they wouldn’t take holiday and therefore wouldn’t rest and could put their health and safety at risk.

The Working Time Regulations left it to individual country’s to decide HOW holiday pay should be calculated and this has led to different practices.

Some salons pay average earnings including average commission others only paid the employee their contracted hourly rate when they have taken holidays ignoring commission. The thought process being if you are on holiday you haven’t earned any Commission.

The Test Case

Involved an employee of British Gas. His case has worked its way up through the British tribunal system to the European Court of Justice and a preliminary ruling has been given in his favour.

He worked in sales and received commission in arrears. When on holiday he didn’t sell anything so lost out. For 2 weeks his commission earnings were significantly reduced as he wasn’t at work. It meant in future weeks his earnings were also affected as he hadn’t earned commission for 2 weeks. Therefore there was a clear disincentive for him to take holidays.

The Advocate General has given preliminary advice which is clear ie that his pay should take account of what he would have earned if he had been working. The parallel with salons is clear. If I earn commission , and my wages fluctuate ,and my holiday pay doesn’t include an element of commission then there is a financial penalty for taking holidays. What should I be paid? The logical answer is the average of say the last 13 weeks ( although the ECJ didn’t say how it should be worked out).

I wasn’t surprised by the decision. We have already had a similar case where the Supreme court decided that allowances regularly paid to airline pilots should be paid in their holiday pay. However I am aware that many salons do not pay average commission or any commission when staff take holidays.

What Next?

The case has received widespread publicity and was featured on breakfast television. This is a really important decision as it could similarly apply to regular overtime earnings or other bonus schemes. In theory employees could claim arrears going back to 1998 when paid leave was introduced, but the extent of possible back dating is still to be decided. There is a technical point here where we benefit from this being a European Decision. The minimum annual leave under the European Working Time Regulations is 20 days, it is the UK which introduced the 28 figure as recognition of the 8 bank holidays. So it could be argued this decision only relates to 20 days or 4 weeks of holidays. It might cause more trouble than it’s worth to go down this route and make the situation even more complicated.

One stance could be to wait and see if the Government might change the domestic laws, or to do nothing and hope for the best. This is only the Advocate General's opinion, and so his views are not binding on the European Court of Justice but nobody expects a different decision to be reached.

Personally I wouldn’t recommend either of the options above. I would be tempted to inform staff when they take holiday their pay will include “average commission”. You could do this for future holidays or I would consider going back to the start of your current holiday year. I appreciate it’s a cost but it might mean you aren’t pursued for further arrears. This is potentially costly decision for some salons.

David Wright Personnel

Phone - 01302 563 691

Mobile - 07930 358 067