Holiday pay should be calculated to include results-based commission

The EAT decision follows an opinion from the Attorney General, the European Court of Justice and Employment Tribunal. You can read our summaries of the decisions by following the links to the right, but the facts are below.

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’.  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 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-emphaised 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…’

Both tribunals made it clear that the question was not about whether the commission received by Mr Lock should be included or not.  The ECJ had made it clear it should!

The question was whether the Working Time Regulations could be interpreted to give effect to the ECJ decision.  Both the employment tribunal and EAT concluded that they could.

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, is to require employers to calculate holiday pay based on an average of the previous 12 weeks’ pay.

This decision is not a surprise.  It is exactly what I expected.

• Employers need to consider the following points:
• Not all commission payments will qualify and have to be included in the calculation of holiday pay.
• The decision relates only to the calculation of four 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).
• As the employment tribunal decision has been upheld by the EAT, it is binding on employment tribunals considering similar issues. According to the EAT decision there are currently 978 similar claims against British Gas alone and thousands of others which have been stayed pending this decision!
• Employers with commission schemes are likely to face claims for back pay.
• This may not be the last of this case. British Gas have sought permission to appeal the decision to the Court of Appeal.

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.

Quantrills can help with this. It is a very murky area.  Get in touch today by email or call me for a short, no obligation, chat on 01473 694407.  Be one step ahead of your employees who are sure to be considering their options (again!).