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Commission and holiday pay case heard by the Employment Appeal Tribunal

An answer in the long running saga on whether commission should be included in holiday pay came a step closer recently when the Employment Appeal Tribunal (EAT) heard an appeal in the case Lock v British Gas Trading. The judgment is expected early in 2016.

Lock was paid commission on the sales he made. While on holiday, he received his basic pay plus any commission earned before his leave. However, being on holiday meant he could not generate sales so his commission payments reduced in the period following his time away. He claimed that under the Working Time Regulations 1998 his pay accumulating during annual leave should be his basic salary plus a sum representing the amount of commission he would have earned had he been at work.

The employment tribunal referred the case to the Court of Justice of the European Union which held that the working time directive, on which the UK’s regulations are based, requires commission to be included when calculating holiday pay. The employment tribunal duly inserted wording into the regulations to make them compatible with the directive, meaning that commission and similar payments must be included in holiday pay calculations.

In reaching this decision, the tribunal relied on the EAT judgment in the case Bear Scotland v Fulton, in which it was held that non-guaranteed overtime payments should be taken into account when calculating holiday pay. British Gas appealed, arguing that commission and overtime are dealt with under different provisions, and should not be treated in the same way as guaranteed overtime when calculating holiday pay.

The reasoning behind the original Lock decision (and similar cases) is that the EU working time directive is intended to encourage workers to take their annual leave entitlement, as there are important health and safety reasons for taking rest. Any disincentive to take leave (such as losing commission or overtime pay) could, therefore, be open to challenge. The difficulty for employers is knowing how far this principle should be stretched in practice.

Many other issues still remain unresolved, including whether voluntary overtime and bonuses must be taken into account in holiday pay calculations. What the correct reference period should be for calculating such payments is also uncertain. For example, for commission payments, should holiday pay include average commission earned over the previous 12 weeks (as required by the regulations) or the previous 12 months? Having a longer averaging period would even out potential peaks and troughs.

If British Gas’ appeal is successful, it will mean the UK’s regulations are incompatible with the EU’s directive and new legislation will be required to fix that. However, it is important to remember that commission would only have to be taken into account from the date that new legislation takes effect, whereas employers are currently liable to claims for backdated holiday pay (although there is a two year cap on pay arrears under the Deduction from Wages (Limitation) Regulations 2014).

If the appeal is unsuccessful, the employment tribunal’s decision will stand and commission will have to be included in calculations of holiday pay. A further employment tribunal hearing will be required to determine how much British Gas must pay Lock to compensate for the missing commission payments, including whether the referencing period should be the previous 12 weeks, the previous 12 months or some other period.

Hopefully the EAT will take the opportunity to clarify a few points in its judgment given the significance of the issues in this case but, whatever the outcome, there are likely to be further appeals to the Court of Appeal or the Supreme Court so it could be many months or even years before we have all the answers.

Added: 16-12-2015
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