Employers should take advice on holiday pay to avoid legal actions

17 August 2016

The law on how to calculate annual leave has been troubling and continues to trouble and cause confusion. This is due to the practical difficulties in the implementation of the Working Time Directive and the case law from the European Court of Justice.

Employers should take advice on holiday pay to avoid legal actions

There is an entitlement under the legislation, namely, the Working Time Regulations (Northern Ireland) 1998 that employees have an entitlement to 5.6 weeks annual leave, 28 days.  The question which has been vexing employers is what is to be paid to an employee when they are on annual leave especially in circumstances where their pay fluctuates on a weekly or monthly basis, for example; based on commission payment, shift payments, overtime or any additional payments received.

The case law from Europe has required our legislation to be “rewritten” or to have words inserted into it, to the extent that the Working Time Regulations in its current format do not reflect the law on an employee’s entitlement to annual leave.  The European Court of Justice has stated that an employee who is on a period of annual leave is entitled to his/her “normal remuneration” and a recent decision from the Employment Appeal Tribunal in Lock v British Gas has confirmed that this includes commission.  Mr Lock had a basic salary but 60% of his actual pay was the commission he earned as a trader, which naturally fluctuated depending on sales.   When he was on a period of annual leave he received the commission for sales achieved prior to that date, however on his return from annual leave his subsequent pay would have been reduced in light of the fact that he had not been making sales during a period of annual leave.  The European Court of Justice held that this was a deterrent to employees exercising the right to take annual leave and therefore commission had to be included in the calculation of his pay when he was on leave.

However this has left employers with the difficult, practical consequence of how do you calculate what that entitlement is during any period of annual leave or thereafter and what is the reference period over which this is calculated.  The Lock decision was recently heard in the Employment Appeal Tribunal which referred to an average payment on annual leave over a 12 week reference period prior to the date of taking annual leave, however for most employers this is rarely a simple calculation especially in the event that an employee has different hours of working and different rates of pay due to overtime and other working supplements.

Employers should always take advice to ensure they are not acting illegally in the payment of annual leave as this would allow an employee to bring an unlawful deduction from wages claim.

 Maxine Orr is a Partner in Worthingtons Commercial Solicitors, Belfast specialising in Employment Law.

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