Employment Tribunal Ruling on Holiday Pay and Commission

The employment tribunal has given its ruling in the case of Lock v British Gas concerning commission and holiday pay. 

In order to give effect to EU law which requires that a worker receive their normal pay whilst on holiday, it has added wording to aid the interpretation of the Working Time Regulations 1998 (“WTR”) to ensure that the calculation of holiday pay includes commission the worker would have earned if they had not been on holiday. The European Court of Justice ("ECJ") had previously concluded that commission must be factored in when calculating holiday pay and the employment tribunal has confirmed the position. Unfortunately it appears not to have answered the question of the correct reference period to use, leaving this to be determined at a later date.

Mr Lock’s remuneration comprised a basic salary and commission. The commission made up over 60% of his total remuneration. When he went on holiday he was paid an average of his basic pay over the preceding 12 weeks, together with any commission which fell to be paid as a result of sales achieved in an earlier period. However, in the weeks following his holiday his pay dropped as he was unable to earn commission whilst on holiday. In May 2014, the ECJ ruled that this did not comply with Working Time Directive. Holiday pay should include an amount to reflect commission a worker would have earned had they not been on holiday. Otherwise, the worker would suffer a financial disadvantage at a later date as a result of not being able to earn commission whilst on holiday. This was liable to deter him from taking holiday which was contrary to the objectives of the Working Time Directive ("WTD"). 

It was for the national court to determine how the amount of commission included in holiday pay should be calculated but the tribunal should focus on the average commission earned in a reference period considered to be representative under national law.

The case returned to the employment tribunal in February for a ruling on:

• whether the WTR (which implement the WTD) can be interpreted purposively to give effect to the WTD;
• if so and holiday pay is found to be due to Mr Lock, what reference period should be used for the calculation;
• the amount of holiday pay owed to Mr Lock.

Only the first issue was decided by the employment tribunal on this occasion. It ruled that the WTR can be interpreted purposively to give effect to the WTD. Employees with normal working hours whose remuneration includes commission will be deemed to have remuneration which varies with the amount of work done, despite the fact that in reality their remuneration varies based on the results of their work (because commission is results-based) rather than the amount of work done during their normal working hours.

As a result of the employment tribunal’s ruling, workers with normal working hours who receive commission based on results have to have their holiday pay calculated by reference to their average pay and commission over a reference period. The relevant statutory provisions that are now deemed to apply to commission-based workers with normal working hours provide that the remuneration should be averaged over the 12 weeks before holiday is taken. However, there is still some doubt over whether using a 12 week reference period, rather than perhaps a 12 month reference period, is sufficient to comply with EU law. For example, seasonal businesses could require employees to take holiday throughout the low season at a time when little commission has been earned, resulting in a lower rate of holiday pay than if they had taken their holiday in the middle of the high season. It is not entirely clear from the employment tribunal’s judgment, but it seems that this important issue will not be decided until a later date. Of course if the case settles in the meantime it could be some time before the issue is resolved.

Note that:

• commission only has to be included when calculating holiday pay for the basic four week statutory holiday entitlement under the WTR, not the additional 1.6 week entitlement;
• holiday pay for workers who do not have normal working hours has always had to include commission as all elements of their remuneration are averaged out when calculating holiday pay;
• where claims are issued on or after 1 July 2015, claims for arrears of underpaid holiday will only be able to go back two years. Claims issued before then could claim arrears over a longer period, potentially going back as far as 1998 (when the WTR were introduced) or the start of employment, if later. However, following the decision of the Employment Appeal Tribunal in Fulton v Bear Scotland , claims for arrears of holiday pay will be out of time if there has been a gap of more than three months between underpayments. So once a worker has been paid correctly for three consecutive months, he loses the right to claim in respect of previous underpayments.