Irwin Mitchell | Focus on Employment | Holiday pay update: Commission case clears first hurdle

Holiday pay update: Commission case clears first hurdle

The Leicester Employment Tribunal, in the much publicised case of Lock v British Gas, has ruled that the Working Time Regulations can be reworded to enable UK legislation to comply with the requirements of the Working Time Directive. Although this decision is not binding on other tribunals, it is important because, it neatly resolves the potential conflict between EU law and domestic legislation. If it is followed in other cases, it may pave the way for more holiday pay claims to be brought involving different types of commission schemes and potentially discretionary bonuses and other forms of remuneration.

Background to the case

Last year the ECJ ruled that Mr Lock should, as a matter of EU law, have commission included in his holiday pay. He was paid a basic salary of £14,670 per year plus commission which was linked to his performance as an ‘energy trader’ (his job was to obtain new customers for British Gas, and persuade existing ones to upgrade their accounts).

Mr Lock did receive the benefit of the commission he had already earned when he took annual leave, but he complained that he could not earn commission during his holiday which impacted on the salary he received in later months. He argued that his salary should have been enhanced to reflect the amount of commission he would have earned, otherwise this could deter workers like him from taking a holiday.

The ECJ agreed. To understand the reason for this, it is necessary to consider the rationale which underpins the Working Time Directive. The requirement to provide workers with paid holiday is a health and safety initiative – implemented to ensure that workers take a break from the demands and stresses of work. It is regarded as a particularly important principle of social law, from which there can be no derogations.

Workers must not be discouraged from taking leave. Therefore the pay they receive whilst absent, must generally correspond to what they would have received had they been at work.

In Mr Lock’s case commission amounted to 60% of his earnings, and he could not earn commission whilst on holiday – a clear deterrent from taking time off.

The case then returned to the Employment Tribunal, where the question for determination was whether the Working Time Regulations could be interpreted so as to give effect to EU law.

The Tribunal’s decision

The Tribunal found that UK legislation could be read so as to be consistent with the ECJ’s decision and it achieved this by adding new wording to the regulations. In essence, this means that workers whose remuneration includes commission or similar payments, should have their holiday pay calculated in the same way as workers whose pay varies according to how much work they actually do. Commission will have to be included in the calculation.

What happens next?

As Mr Lock’s case has cleared this hurdle, the Tribunal will have to determine, at another hearing, what compensation should be paid by British Gas to ensure that workers like Mr Lock are not disadvantaged by taking a holiday. This is likely to be done by averaging his pay over a given reference period which it will have to determine.

No dates have been set down for this hearing, but we expect it to take place within the next few months.

Does this decision mean that employers have to include all commission payments made to staff in their holiday pay?

The Tribunal made it clear that they are bound by the earlier decision involving overtime in Wood and others v Hertel and Fulton and Bear Scotland Limited which found that the requirement to include (in that case overtime payments) in holiday pay only applies to the first 20 days of leave taken and not to any additional statutory or contractual leave.

It is also doubtful that all forms of commission payments will have to be included. It is important to bear in mind that this British Gas commission scheme was straightforward and Mr Lock was paid according to the outcome of his own work. It was very clear that Mr Lock suffered a loss when he took a holiday. Ascertaining loss will not be as straightforward in other cases where, for example, commission is paid annually, or where the scheme involves discretionary assessments based on a worker’s broader contribution, or where this is in part based on individual performance as well as team performance.

We expect to see workers being encouraged to bring further cases and to try to ‘push the boundaries’ of what they expect to have included in their holiday pay. This issue is not limited to commission payments either, but might also include arguments about whether annual bonus payments and other performance related payments should also be included.

Key Contact

Glenn Hayes