An interesting combination I’m sure you will agree but how are they linked? The Working Time Directive – that’s all about working hours, time off between shifts and annual holidays. Bonus schemes help organisations to incentivise individuals and teams achieve goals and targets through bonus payments. Hmmm not much of link there. I recently attended a Dentons employment law briefing on holiday pay where the link between the Working Time directive and Bonus Schemes was highlighted.
The recent judgments on holiday pay and the Working Time Directive have implications for Bonus Schemes. The European Court of Justice (ECJ) decision in Williams and others v. British Airways plc established that holiday pay is not limited to base pay alone but should be based on “normal remuneration”. The Williams case established that holiday pay should include payments
- linked intrinsically to performance of tasks employees are required to perform
- payments in respect of the individuals professional or personal status.
In a subsequent judgement by the ECJ in the case of Lock v. British Gas Trading Ltd they applied the above Williams decision and held that where a worker earns commission payments, these must also be included in holiday pay. The ECJ background to the decision is that where an employee’s earning normally include commission, not paying commission payments would place the worker at a financial disadvantage during holidays and, therefore, may deter the individual from taking their holiday entitlement. There are other claims in the pipeline concerning overtime.Although the final decisions regarding UK legislation will come from the Employment Appeals Tribunal (EAT) in due course, it seems likely that to calculate holiday pay on base pay alone will be illegal where other payments are normally made.
So how does this link the WTD and bonus schemes?
Bonus schemes invariably include some link to team or individual performance through measuring outputs, sales target achievement etc. No one can doubt that the employees are required to do the tasks and that it is linked to their bonus payment therefore they will need to be included in holiday pay calculations. The ECJ takes the view that achievement of bonus targets and resultant payments might mean that an employee would not take holiday in order to get better performance results. Some interesting questions arise here. Do high achievers in your bonus scheme take less holiday that their peers? How long is the sales process and could taking two weeks holiday affect performance achievement?
How can organisations calculate the bonus portion of holiday pay?
Its seems a quite simple calculation to include commission or bonuses that are paid monthly or quarterly but for half year or annual bonuses this may be more difficult. This raises a number of questions. The normal period for calculating a week’s wages is based on 12 weeks.
- Is this long enough to be a true reflection of an individual’s pay for holiday purposes if there is a half yearly or annual bonus payment?
- If it the period was extended to 6 or 12 months how representative can this be as we’re frequently told “past results cannot be relied upon to predict future performance”!
- If annual bonuses are somehow included in holiday pay can an employer make a subsequent corresponding deduction when the bonus is usually paid?
- What if the subsequent bonus payment is cancelled due to economic conditions?
Don’t sit on your hands.
We will have to wait for the final EAT decisions in the relevant cases to fully understand the implications of the ECJ rulings but in the meantime many organisations are beginning to calculate the potential impact of these decision to better understand their financial liabilities. For example calculating the cost of back paying overtime and other allowances. Organisations with bonus schemes may be advised to review if and how holidays might impact individual and team bonus targets and what the cost would be to respond to any claims. It may be worth studying if high bonus payments are linked to not taking full holiday entitlement or vice versa.Will these decisions impact your business?
Simon Whysall Employment partner at Dentons says “Whilst the full effects of the decision remains to be played out, employers should be acting now to assess the potential impact on their businesses”.
What questions do these decisions raise for you? Please add your comments below. If you would like some help to review your bonus scheme please call Alan on 07446208784.