The Court of Appeal confirmed on Friday that holiday pay must include results-based commission for the four week period of Euro leave. However, a number of unanswered questions remain.

British Gas v Lock

Mr Lock is a sales consultant with British Gas who made an unlawful deduction from wages claim on the basis that his holiday pay should have included a sum representing the results-based commission he normally earned.

The Working Time Regulations 1998 state that employees with ‘normal working hours’, whose remuneration does not vary with the amount of work done, are entitled to basic pay only during annual leave. However, this conflicts with the approach taken by the European courts, which have decided that holiday pay should represent ‘normal remuneration’ and so include commission and other similar regularly received payments.

The Court of Appeal agreed with the approach taken by the employment tribunal and the Employment Appeal Tribunal (see our earlier blog) and confirmed that words can be read into the Working Time Regulations to provide that results-based commission should be reflected when calculating holiday pay. This is because UK courts are required to interpret domestic legislation in line with the European Directive they originate from, provided that it is possible to do so without going against the ‘grain and thrust’ of the UK statute.

The parties agreed that results-based commission need only be included in holiday pay in respect of the four week period of Euro leave, not the 1.6 weeks’ additional statutory leave nor any contractual entitlement on top of that.

Do all commission payments need to be included?

The Court of Appeal’s decision is limited to contractual results-based commission only, where payment depends on the success of the individual worker’s sales. The judgment questions whether holiday pay should include commission which only becomes payable at the point in the year when a particular level of turnover, profit or threshold is reached (meaning that no commission is received some months) but the court made no decision on this point.

Do we need to include bonus payments?

The Court of Appeal referred to a banker receiving a single large results-based annual bonus in March. Would he be entitled on his summer holiday to holiday pay including an element referable to his bonus? No ruling was made, the Lock decision being confined to its specific facts.

Whether you need to include bonus payments for workers with ‘normal working hours’ is likely to depend on the nature of the bonus and terms of the bonus scheme.  For example, if a bonus is based solely on company performance, and an individual’s entitlement is not affected by the amount of holiday they take, they would not appear to have any grounds for a claim.  On the other hand, if a bonus is linked to personal performance, and this is impacted by the amount of holidays taken, there may be scope for an employee to argue that they have lost out.

What about overtime, standby and call-out payments?

Our blog posted in May considers whether holiday pay should include voluntary overtime, standby and call-out payments for workers with ‘normal working hours’. Much will depend on whether the payments are sufficiently regular to have become part of normal pay.

What is the correct reference period for calculating holiday pay?

For Mr Lock, as his holiday pay is to be calculated as if he has ‘no normal working hours’, it will be based on an average of the sums earned in the previous 12 weeks. For others, the position remains unclear. The Court of Appeal did not given an opinion on what the appropriate reference period would be for other types of case. Some commentators have suggested that it should always be 12 weeks but others favour it being dependent on industry norms and the terms of the relevant scheme.

What impact does Brexit have on all of this?

Nothing for now. Whilst the UK remains part of the EU, domestic legislation requires to be interpreted in line with any relevant European Directives and case law. It may be, however, that at some point in the future the government will legislate to exclude payments such as commission and voluntary overtime from holiday pay.

What now?

British Gas has indicated that it intends to appeal to the Supreme Court, perhaps not surprising given that it is facing around 1,000 holiday pay claims on the back of the Lock case.

The Court of Appeal’s decision does not take us much further forward as it did not answer some of the practical questions currently facing those employers paying allowances and premiums on top of basic salary. For example, when is a payment paid with sufficient regularity for it to be treated as normal remuneration? What scope is there for an employer to decide on the appropriate reference period? Is there capacity to average payments of holiday pay to reflect the sums received by the worker over the whole year?

There is still no ‘one size fits all’ approach to the holiday pay issue and we are happy to talk it through. Please get in touch to discuss how we can help manage the potential risks.