Commission and holiday pay calculation

For ease, the facts of this case were:

Mr Lock was employed by British Gas as an Internal Energy Sales Consultant. He was paid a basic salary and commission based on the sales he made. His commission represented, on average, over 60% of his take home pay.

British Gas paid holiday pay to Mr Lock based on his basic salary only plus commission on sales he had earned prior to the holiday period. This resulted, in the weeks and months after the period of leave, in times when Mr Lock only received basic salary and not commission. This was because Mr Lock was not at work during the period of leave, did not make sales and did not generate any commission.

Mr Lock brought a claim against British Gas contending that his holiday pay should be based on basic salary and average commission.

The employment tribunal asked the European Court of Justice (ECJ) whether employers should include commission when calculating holiday pay.  As we detailed in our earlier articles, both the Attorney General and ECJ concluded that Mr Lock should be paid holiday pay including overtime.  Since the ECJ, we have been awaiting the employment tribunal to see how to give effect to the ECJ decision.

The Leicester employment tribunal made it clear that the case was not about whether the commission received by Mr Lock should be included or not.  The ECJ had already decided that it should!  The case was about whether the Working Time Regulations could be interpreted to give effect to the ECJ decision.  The employment tribunal, unsurprisingly given the EAT case last year of Bear, concluded that it could.  How?

Well the employment tribunal added wording to the Working Time Regulations which requires employers with workers who have normal working hours but who receive commission or similar payments to calculate holiday pay as if their pay varied with the amount of work done.  The effect is to require employers to calculate holiday pay based on an average of the previous 12 weeks pay.

The effect of this decision is not a surprise and is exactly what we had anticipated.

It is worth bearing in the mind the following points.

Not all commission payments will qualify and have to be taken into account.  Employers will need to review the position quickly (if they have not already).

This decision, as with previous holiday pay cases, relates only to the calculation of four week’s holiday and not all of the current statutory minimum of 5.6 weeks or any enhanced holiday.  Employers should, however, check any contractual provisions.

It is an employment tribunal decision.  It is not strictly speaking binding on other employment tribunals considering similar issues.  That said, given that the employment tribunal is giving effect to an ECJ decision and following the lead of the EAT case in Bear, we think it is very unlikely any employment tribunal will tread a different path and, arguably, employers (who have not already) need to reconsider how they calculate holiday pay where they operate similar commission schemes.

Employers with commission schemes to which this case applies may face claims for back pay.  Watch out for our article about the legislation which has been introduced limiting the potential impact of such claims and restricting back pay to two years (for cases issued on or after 1 July 2015).