Holiday pay to include sales-related commission

13 October, 2016
by: Cripps Pemberton Greenish

Last year, we reported on the Employment Tribunal’s decision in Employment - pound signLock v British Gas Trading Ltd regarding the calculation of holiday pay. The case has since been heard by the Employment Appeal Tribunal and last week, the Court of Appeal upheld the Employment Appeal Tribunal’s decision, ruling that sales-related commission should be included in statutory holiday pay.

One of the key motivations behind the European Working Time Directive (Directive) is to help guarantee the health and safety of employees within the EU. As such, the Directive provides that workers have the right to paid annual leave but does not detail how such payments should be calculated; neither do the UK’s domestic Working Time Regulations 1998 (Regulations).

Background

Mr Lock was a sales consultant at British Gas Trading Limited (British Gas). He earned basic pay, together with a sales-based monthly commission payment that amounted to roughly 60% of his total remuneration. In December 2011, Mr Lock took two weeks’ paid annual leave. During his leave, he received his basic pay and commission that he had earned during the previous weeks. However, in the months following his holiday, Mr Lock received a considerably smaller salary because he had been unable to generate commission during the weeks that he was on holiday.

Employment Tribunal and European Court of Justice

Mr Lock brought an Employment Tribunal claim for unpaid holiday pay on the basis that his holiday pay did not reflect his actual salary.

In 2014 the European Court of Justice ruled that where a component of pay is “intrinsically linked” to an employee’s contractual duties, it should be included in their holiday pay. The case was then referred back to the Employment Tribunal who decided that the domestic Regulations could not be interpreted in line with the Directive. It ruled that employees whose salary includes “commission or similar payments” should have their holiday pay calculated in the same way as those who receive a fixed salary based on the amount of work done. 

Employment Appeal Tribunal and Court of Appeal

The Employment Appeal Tribunal (EAT) dismissed an appeal by British Gas, who then took the case to the Court of Appeal (CoA). The CoA agreed with the EAT, concluding that the domestic Regulations provided for a lower measure of holiday pay than intended by the Directive. It concluded that the Regulations should be interpreted so to require Mr Lock’s holiday pay to be calculated by reference to his normal salary, which in the ordinary course of his employment includes his commission payments.

What does this mean?

The Court of Appeal decision confirms that the Regulations can and should be interpreted in line with the Directive, providing certainty (for now) for many employers. However, this does not mean that employers need to rush into making changes to their holiday pay calculations.

British Gas has previously commented that the decision could result in approximately 1,000 potential claims from its employees. It is therefore widely expected that they will appeal the decision to the Supreme Court.

There is also uncertainty as to how Brexit will impact upon the decision. The Court of Appeal’s decision is based on the correct implementation of European law but, in the event that European Directives no longer bind domestic legislation, UK law may well revert to the previous position that holiday pay refers to basic pay only.

This ongoing uncertainty means that employers should think carefully and seek legal advice before making any changes to the way they calculate holiday pay.