Changes in the Law
As it stands many businesses pay only basic salary during holiday periods. However employers may now have to increase their employees’ pay while they are on annual leave if they work overtime or earn any kind of commission.
The recent decision in Lock v British Gas confirms that employees’ commission earnings form part of their 'normal remuneration' for the purposes of calculating holiday pay. This follows recent rulings that holiday pay should account for paid overtime as well as basic salary.
These decisions affect thousands of employers in the hospitality industry, adding significantly to wage bills going forward.
What does this mean?
Full time employees are entitled to a statutory minimum of 28 days’ holiday per annum, although some employers offer additional contractual holiday. Only 20 of the 28 days’ holiday are subject to European law, and it is to these 'European' 20 days the new rulings apply.
Employees can now argue their holiday pay should include overtime, commissions, shift allowances and in some cases bonus earnings. Waiting staff earning discretionary tips may seek to argue that tips form part of their 'normal remuneration', potentially creating the absurd situation whereby the amount of holiday payable by employers is decided by a third party customer over whom they have no control. Employers are unlikely to see an increased profit from the work that resulted in a larger tip, making it harder to control their own budgets if this must be accounted for in holiday pay.
The Tribunal has yet to confirm how holiday pay should be calculated where the amount of overtime pay or commission earned fluctuates from month to month. However, it is likely to recommend that calculations are based on average earnings during a reference period of 12 weeks prior to the holiday.
Employees can also claim for historic underpayment of holiday pay if it has not previously included a payment in lieu of overtime and commission earnings. At present there is potential for employees to claim historic underpayments going back several years.
How can you mitigate risk?
- The hospitality industry is often affected by seasonal spikes. Employees may be inclined to boost their holiday pay by taking the majority of their annual leave immediately after a busy period during which they have worked more overtime or earned higher rates of commission. You might therefore decide a 12-month, rather than 12-week, reference period is more appropriate for your business.
- If your business does not operate a formal tronc system and employees collect tips direct from customers then it will be difficult for you to monitor the income received by employees from customers for the purposes of calculating holiday pay, if you are required to do so. As such, you may decide to convert to a formal system of collecting gratuities, although this may result in increased National Insurance Contributions and other tax implications, and so will require careful consideration first.
- You may also implement a policy restricting when holiday can be taken in order to balance the costs.
- Consider whether you will calculate holiday pay differently for only the 20 days to which the new rules apply. While this might save wage costs, you should assess how you would monitor and administrate such a policy in practice.
- As there is a risk of current as well as historic claims, you should take specialist advice where appropriate, to establish the most cost effective solution for your business.
Along with a number of other holiday pay cases already working their way through the tribunal system, an appeal of the Lock judgment is likely given its costly impact on a large number of businesses. Keep your eyes peeled.