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Holiday pay should include commission

26 February 2016

The Employment Appeal Tribunal (EAT) has ruled that commission payments should be taken into consideration when calculating holiday pay. In the case of Lock v British Gas Trading Limited the EAT was asked to consider if the Working Time Regulations 1998 mean that holiday pay must include relevant commission payments.

Background

The European Working Time Directive provides that workers have the right to paid annual leave but it does not specify how such payments are to be calculated. This right is implemented in UK legislation by the Working Time Regulations 1998, which state that a worker will be paid at the rate of a ‘week’s pay’ for each week of leave. However, the regulations fail to qualify what constitutes a ‘week’s pay’.

Mr Lock, a sales consultant employed by British Gas, was paid a basic salary plus a sales-based commission. This commission accounted for over 50% of his total pay, was variable and paid in the months following the sales to which it related. When Mr Lock was on holiday, he was unable to make any sales and therefore his income reduced to his basic pay for the period he was on leave, and also the immediate period after. He argued, with the backing of his union UNISON, that a ‘week’s pay’ should incorporate an average of his commission payments. As part of his argument he referred to the EAT’s ruling in Bear Scotland Limited v Fulton and Baxter  in which it was held that regular overtime payments can be included when calculating holiday pay.

Mr Lock brought an employment tribunal claim for unpaid holiday pay in respect of the commission based element of his pay. The tribunal referred the matter to the European Court of Justice (ECJ) owing to the fact that there was a conflict between domestic and ECJ case authorities on the area. The tribunal essentially asked the ECJ to determine whether holiday should include commission payments that would have been accrued had the individual not been on annual leave.

The ECJ ruled that the European Working Time Directive obliges employers to pay workers their normal remuneration during annual leave, and that holiday pay should be calculated to include payments that are intrinsically linked to the worker’s contractual duties. It referred the case back to the tribunal requiring it to determine whether the Working Time Regulations can be interpreted in line with their decision.

The tribunal decided that they could (which was in keeping with the decisions regarding the inclusion of overtime within holiday pay). British Gas appealed this decision on the basis that Bear Scotland had been incorrectly decided and that in any event it was irrelevant given it concerned overtime and not commission payments. The EAT dismissed this argument, stating that there was no basis upon which commission and overtime should be treated differently.

Next steps – what should I do?

The appropriate course of action is largely dependent on whether British Gas appeal further. If they do then the case is unlikely to be heard until early 2017, and this will mean that employers will continue to be in limbo, and that the hundreds of other claims which have been stayed pending this decision will remain unheard.

Alternatively if British Gas do not appeal further, then employers would be wise to adjust holiday pay calculations as tribunals will be bound by this EAT decision (as they are by the decision in Bear Scotland). We would advise any employer wishing to make adjustments to how holiday pay is calculated to contact us, as it will be essential to establish where one can draw a line between regular and irregular payments, and to identify the correct applicable reference period.

Want to discuss this in more depth?

Along with the new tax year in April come the latest changes in employment law. In March, we are hosting our popular hour-long general employment law update breakfast seminars at 7.30am until 9am (a light breakfast is provided) on Tuesday 22 March in Cheltenham or Wednesday 23 March in Gloucester. To attend or for more information visit the event’s section of the website or email us.

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