Holiday pay must include commission, the Court of Appeal has confirmed in its judgement in the long-running Lock v British Gas case – but key questions remain around the timescales involved for back-dating pay claims, and the situation regarding bonuses and other forms of variable pay.
Employment lawyers agreed that employers offering a regular commission scheme which is intrinsic to the job their employees do – including overtime or stand-by payments – must include this in holiday pay as a result of the latest ruling, though there remains the possibility of a further appeal.
The case is now in its fifth year. Lock, a salesman for British Gas, claimed at an original employment tribunal that British Gas owed him back pay on the basis that his holiday pay did not reflect any commission that he would have earned had he been working at the time. On top of his basic salary, Lock was paid monthly commission, which fluctuated based on the number and scale of sales he made.
The European Court of Justice (ECJ) ruled that since Lock’s commission was directly linked to the job he does, it should be taken into account when British Gas calculated his holiday pay. The ECJ ruling was applied in UK law, and the tribunal added a supplementary clause to the Working Time Regulations 1998.
But one of the main conflicts in the Court of Appeal involved the question of whether the Working Time Regulations 1998 could be interpreted to include commission in Lock’s holiday pay. The court also heard arguments about whether including commission in holiday pay for workers such as Lock might be too broad and therefore have unintended consequences, such as an effect on staff who receive an annual discretionary bonus based on team or organisational performance.
The outcome of the case has left questions unanswered for many employers, according to Andrew Granger, partner in the Employment, Pensions and Mobility group at Taylor Wessing.
He said: “Many employers, and those in the legal industry, hoped the length of reference period employers will need to take into account when calculating holiday pay would be clarified, but the judge opted for it to be decided on a case-by-case basis.
“Another thing that wasn’t decided – but nobody expected it would be – is the criteria applied to other sorts of variable pay. The ‘elephant in the room’ here was bonuses, which for some employees considerably exceed their salary. The only thing that’s been made clear for employers through the outcome of this case is including commission when calculating their staff’s holiday pay.”
The parties agreed that the outcome of the Court of Appeal decision should apply only to individuals who have normal working hours, and whose pay does not vary according to the amount of work done, but who receive individual results-based commission as a part of their normal remuneration.
Employers will have to carefully consider what they believe constitutes ‘normal remuneration’ for staff, as well as the period it should be measured across. “It may be better in financial and HR terms to be proactive and to seek agreement with workers, or to wait for the issue to be raised by or on behalf of those workers,” Granger said.
Aye Limbin Glassey, employment law partner at Shakespeare Martineau, emphasised that employers need to act quickly to open up lines of communication with their workforce about holiday pay. She said: “Despite the potential for an appeal, now is the opportune time for employers to put the necessary measures in place and open lines of communication with beneficiaries.”
It is unclear whether British Gas will appeal the decision and take the case to the Supreme Court. The company may face around 1,000 potential similar claims from its employees, according to employment lawyers.
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