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Holiday Pay and Commission - the saga continues...

Posted on Mar 26, 2015 by  | 0 Comments

Back in October Hayley blogged on the case of Lock v British Gas Trading Ltd in which the European Court of Justice (ECJ) decided that commission payments to workers should be taken into  account when calculating holiday pay. 

To remind you...in the Lock case, the employee was an Energy Sales Consultant, responsible for selling energy products on behalf of his employer, British Gas. Mr Lock received a basic salary but also received commission in respect of sales made. The amount received in commission varied each month but always made up a significant part of his earnings – often around 60%. His earnings were paid in arrears so would not drop whilst he was on holiday but as he was not making any sales during this period, there would be a significant drop in earnings in the months that followed. 

Mr Lock brought a claim in the Leicester Employment Tribunal against his employer, arguing that his holiday pay should include commission payments. The Tribunal then referred the case to the ECJ to establish whether there was a duty upon member states to take into account commission payments when calculating holiday pay and, if so, how holiday payments should be calculated to take the commission element into account. It was held that the effect of disregarding the commission element of pay for a worker who regularly receives commission as part of his overall earnings would be to discourage that person from taking annual leave, which would in turn be contrary to the intentions of the Working Time Directive. The purpose of the legislation is to ensure that the worker is in a similar pay position to that which they would enjoy whilst at work and therefore holiday pay should include any sum which is ‘intrinsically linked’ to the performance of the individual’s contract. In Lock, the ECJ also directed that the commission element should be averaged out over a specified reference period in order to determine a fair amount to be paid alongside basic salary. However, the calculation of that reference period was referred back to the Leicester Employment Tribunal to be determined. It was suggested by the ECJ that a 12 month reference period may be appropriate, however, this may not sit well with existing UK legislation which says that the relevant period for calculating a worker’s average hours where their hours are irregular is 12 weeks. So, it is possible that the UK courts could choose either of these periods, somewhere in between or something totally different. 

The decision in Lock followed that of Williams v British Airways which considered the calculation of annual leave payments due to pilots. In Williams, it was held that the amount paid to a worker should reflect ‘normal remuneration’. There are also currently a number of other cases making their way through the court system, and judges have been tasked with determining whether overtime and other bonus payments should also be included in holiday pay calculations. The outcome of some of these cases is still awaited but November brought us the judgement of Bear Scotland v Fultonwhich ruled that workers who carried out non-guaranteed overtime are entitled to expect an element of the overtime pay to be included in their holiday calculation. 

In the meantime, the Employment Tribunal in Leicester has now handed down its long-awaited decision in Lock.  Following the ECJ’s decision, the Employment Tribunal has held that Mr Lock’s holiday pay should include an element for his commission.  It achieved this by inserting new words into the relevant regulation in the Working Time Regulations 1998 - Regulation 16(3)(e) which now states that:

...as if, in the case of the entitlement under regulation 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purpose of s 221. 

The effect of this is to align with the ECJ’s ruling and to reinforce the obligation on employers to include commission when calculating holiday pay.  The Employment Tribunal’s judgment does not cover the question of the length of the correct reference period for calculating the average commission to be included in a week’s pay.  Nor does it cover the question of whether there is still an obligation to include commission in holiday pay where the commission scheme is designed to compensate employees for holidays.  The Tribunal said that those points will be considered at a later date.  Watch this space...  

So what should you do? 

In the meantime, if you are an employer and pay workers on a commission basis, you should now change your approach to holiday pay calculations if commission is not currently taken into account. You may also want to consider settling any backdated claims from employees should any be made. However, as we do not yet have confirmation as to the correct referencing period, another approach may be to sit tight and await the decision regarding this to ensure that any calculations and remedy payments are correct. If this issue has potentially costly consequences for your business, you may want to consider obtaining legal advice on how to best prepare for and/or settle any claims and change holiday pay systems going forward. 

For more information on holiday pay calculations, or how to claim, please get in touch. We would also welcome any comments or views on how you or your business might be affected.

Hannah

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