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Holiday pay - the calculation story continues

Posted on 10th October 2016
Case law

In the latest installment the Court of Appeal has concluded that the Working Time Regulations can be interpreted so that holiday pay should be calculated to include results-based commission.

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Julie Temple Julie
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employers should calculate holiday pay based on an average of the previous 12 weeks' pay

British Gas v Lock [COA] 2016

The Facts

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. It was 'results-based' commission.  His results-based commission represented, on average, over 60% of his take home pay.

British Gas paid holiday pay calculated to include his basic salary plus commission on sales he earned prior to his holiday. Whilst on holiday, as Mr Lock was not at work, he did not make sales and did not generate any commission. His pay later in the holiday year was therefore negatively affected.

Mr Lock claimed that his holiday pay should be based on basic salary and average commission.

The ECJ Decision

The ECJ agreed with Mr Lock. The ECJ decided:
  • Paid annual leave means 'workers must receive their normal remuneration' for the period of leave.
  • Normal remuneration means that workers are 'in a position, as regards ... salary, comparable with periods of work'.
  • This was not achieved by payment of commission already earned whilst on leave as the financial 'disadvantage [was] deferred [and] genuinely suffered … during the period following ... annual leave'.
  • The financial disadvantage may deter a worker taking annual leave, more so where commission represents some 60% of take home pay and this is contrary to the objective of annual leave.
The European Court re-emphasised that:
  • 'any ... aspect which is linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment and in respect of which a monetary amount is provided and included in the calculation of the worker’s total remuneration must necessarily be taken into account for the purposes of calculating the amount to which the worker is entitled during his annual leave'. 
  • 'allowances relating to seniority, length of service and to professional qualifications must be maintained'.
  • 'components of the worker’s ... remuneration ... intended ... to cover occasional or ancillary costs arising at the time of performance of the tasks which the worker is required to carry out under his contract of employment need not be taken into account...'

The Court of Appeal Decision

The question for the Court of Appeal, as for the employment tribunal and EAT before it, was not whether commission should be included (it should) but whether the Working Time Regulations could be interpreted to give effect to the ECJ decision.  The employment tribunal, the EAT and now the Court of Appeal has concluded that they can. 

The employment tribunal did so by adding wording to the Working Time Regulations.  The effect of the wording added by the employment tribunal, and now confirmed by the EAT and COA, is to require employers to calculate holiday pay based on an average of the previous 12 weeks' pay.

Comment

Employers need to consider:
  • Not all commission payments qualify to be included in the calculation of holiday pay. 
  • The decision relates only to the calculation of 4 weeks' holiday.  It does not apply to the full statutory minimum of 5.6 weeks or any additional, contractual, holiday (subject to any contractual provisions).
  • The COA decision is binding on employment tribunals considering similar issues. 
  • Employers with commission schemes are likely to face claims for back pay. 
Any employer operating a commission scheme should:
  • assess if this case applies to their commission scheme;
  • if so, consider options and tactics about including commission in the calculation of holiday pay;
  • review or amend commission schemes to reduce the exposure to possible disputes and claims;
  • assess the scope and potential value of claims for back pay.
We have been and continue to advise a variety of clients on how to calculate holiday pay in light of these cases.  Get in touch if you want to discuss your organisation’s options.

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