September 29, 2014

Insolvent businesses could face extra holiday pay claims

A ruling by the Court of Justice of the European Union (CJEU) has changed the way employers must now calculate holiday pay.

Insolvency and employment experts predict the changes will not only affect cash flow, but could also have an impact on the overall value of a business.

Lock v British Gas Trading Limited confirmed employers are required to include commission in calculating holiday pay for those workers who regularly receive it as part of their remuneration package. Previously, where employees received a basic salary along with other fluctuating payments such as commission, overtime or shift allowances, holiday pay was calculated on basic pay only.

However, the CJEU’s decision interprets basic pay as including any elements of pay that are ‘intrinsically linked’ to the tasks performed under the contract. This includes commission when it is a regular part of an employee’s remuneration package.

During the case it was suggested salary commission calculations are based on a 12 month average, but the Court refused to rule on this aspect of the case, leaving it to the national courts to decide.

It is widely expected that the ruling will mean employers may need to adjust future holiday pay calculations again and employers could face further claims for backdated holiday pay, although the process for calculating these sums is yet to be agreed.

In terms of cash flow and the ability to service debt, there are obvious implications for solvent trading companies and their funders. However, insolvent businesses that are being traded will also be affected in terms of increased trading costs and, due to the higher liabilities acquired by a buyer, this could affect sale price. There will also be an impact generally for insolvencies in terms of the level of claims and potential level of recovery available.

At Royds, we have the breadth and experience to enable us to offer accurate and helpful advice to employers in matters relating to solvent trading companies and calculating holiday pay. For more information, please visit or contact Richard Woodman or Gemma Ospedale.

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