Earlier this year an employment tribunal (Lock v British Gas) ruled in favour of an employee who argued that his holiday pay should reflect his overtime pay as well as his basic wages. This has implicated how employers apply the rules under the Working Time Regulations and has moved the UK closer to EU law.
This week (November 4th) the Employment Appeal Tribunal, having heard submissions, delivered a decision to take in to account overtime earnings when calculating holiday pay. The ruling in the Lock v British Gas case has already led to many employers taking an average daily rate from earnings covering the previous 12 weeks pay. This is a slightly more time consuming process and is also a little trickier to keep track of as the payments for holiday will vary on each request and make it hard to keep track of.
For example; if an employee requests holiday for the 1st of next month and then does an extra 20 hours (at double time) on the weeks approaching that date, then the payment they will receive for their time off will be proportionally higher than if they had done just their standard working hours. It might even look like, on paper in monetary terms, like they had taken more time off than they had as the amount they were paid is greater. This has in fact led to confusion in HR and payroll departments looking at their P&L budget.
According to ACAS this decision made in the tribunal earlier this year relates to the four weeks’ holiday pay that workers are entitled to under European law. It does not apply to the additional 1.6 weeks’ holiday that workers receive under UK law. It seems likely that the judgement will be appealed to clear up the confusion and avoid a situation where there are different rules for different weeks of a worker’s holiday.
The 12 week process actually works very well for agency employees and has be adopted for a long time by some of the larger outsourcing businesses in the UK. This is because temporary workers accrue holiday differently to permanent staff and can only take holiday when they have built up enough days in their fund according to their AWR (Agency Working Regulations), this lead to a more pedantic approach to P&L tracking.
So How Does This Affect Employers with Permanent Staff?
For businesses and recruiters and where wages include commission and bonus payments, the effect of the Lock vs. British Gas case will be considerable.
Employers will need to reassess how they pay holiday pay, by taking into account the risk of historic claims for previous holiday shortfalls. Some employers could even face backdated claims going back as far as 1998 for staff who have been in continuous employment and who have had ongoing ‘underpayments’ of holiday pay.
There are things you can do to brace and prepare for the worst case scenario…
• Calculate how many employees receive commission/bonuses?
And
• How long have those employees worked for you?
Then prepare to amend contracts…
The outcome of the appeal in the Lock vs. British Gas (and other) cases, will mean that private employers will need to review contracts and amend the way holiday pay is calculated.
As the decision has already impacted on public employers a lot of HR agencies have strategy in place, but for private employers there is still a question of what approach employment tribunals could take to implement change.
It is advisable that employers may want to take a longer term review of how commission is paid and how holiday is managed to limit the ongoing impact of any changes.

If you need any help with this, please contact Karen Edwards on [email protected]