Employers need to be wary of holiday pay “minefield”

Employers need to be wary of holiday pay “minefie...

The motivating force behind these judicial decisions is the well being of employees. Annual leave is enshrined in EU law as an important protector and promoter of the health and safety of workers.

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  • Holiday pay should include commission
  • Businesses braced for mass claims which could potentially go back to 1998 when the Working Time Directive was implemented in Great Britain
  • Inclusion of overtime in holiday pay is already being litigated. Could annual bonuses be the next battleground?
  • And how should employers work out what employment tax is due on holiday pay owed?

Commenting on the European Court of Justice’s decision (PDF 163KB) [that “a salesperson’s holiday pay cannot be limited to their basic salary”], KPMG director, Angus Menzies outlines the ramifications of this key decision:

Holiday pay is a real minefield for employers. If employers do not now consider strategies for addressing this issue it could prove very costly. Many employment lawyers already expect holiday pay issues to be one of their most fertile sources of work over the next couple of years.

“The Employment Tribunal must follow the ECJ decision so this case is likely to lead to a flood of similar claims from workers whose wage packets ordinarily include a regular and recurring element of commission but for whom this is not factored into their holiday pay. Whether any law firm or individual employment lawyer picks up the opportunity to specialise in this niche area and runs with it in the way we have seen with Equal Pay claims remains to be seen.”

The European Court of Justice decision also said that “where such a worker is paid commission calculated on the basis of the sales that they make, that commission must also be included in the calculation of the holiday pay”.

Angus adds: “Claims could be sizeable, potentially even going back as far as 1998 when the Working Time Directive (on which the European Court has based its decision) was implemented in Great Britain by the Working Time Regulations. And with decisions confirming that work allowances and commission should be included within holiday pay and overtime in the context of holiday pay already being litigated, the next battleground could well be bonuses – which would lead to a host of issues such as factoring in holiday pay to bonus formulae.

“This is far from the end of the story as there remain other holiday pay cases on appeal still waiting to be heard. But there is a clear direction of travel regarding holiday pay and employers with sizeable workforces, atypical working patterns and/or recurring variable elements of pay in particular need to be aware. What is emerging as a rule of thumb is that if an employee regularly takes home pay which is above his or her ‘basic’ rate then that needs to be considered in the holiday pay calculation.

“The motivating force behind these judicial decisions is the well being of employees. Annual leave is enshrined in EU law as an important protector and promoter of the health and safety of workers. Accordingly the courts want to remove any obstacles to workers actually taking their holiday. Receiving less pay whilst on annual leave than workers would receive if actually working is regarded as a significant deterrent to the taking of annual leave.

“And for employers, as well as the wage bill, there’s the taxman to consider. Where back pay claims are successful there is likely to be tax due. Negotiation with HMRC is likely to be necessary and interest and penalties may be due.”


- Ends -


For further information please contact:

Margot Cowhig

KPMG Corporate Communications

T: 0207 694 4246

M: 07920 274856

E: margot.cowhig@kpmg.co.uk

KPMG Press Office: 0207 694 8773


Notes to editors.

KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with approximately 11,500 partners and staff.  The UK firm recorded a turnover of £1.8 billion in the year ended September 2013. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 155,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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