Yesterday saw the latest instalment in the long running series of holiday pay cases when the Leicester Employment Tribunal released its judgment in the case of Lock v British Gas Trading. The case of Lock concerns the question of whether contractual commission should be taken into account when calculating holiday pay and, if it should, how employers should calculate holiday pay in these circumstances.

In summary, the Employment Tribunal decided that commission determined by reference to sales achieved must be included in holiday pay using the same calculation method as applies to workers with normal working hours whose pay varies with the amount of work done.

You will recall that last May the European Court of Justice (ECJ) in Lock held that if a worker’s pay includes contractual commission determined by reference to sales achieved, an employer must take commission into account when calculating holiday pay. The ECJ then referred Lock back to the Employment Tribunal to determine:

  • whether the method set out in the Working Time Regulations 1998 for calculating holiday pay could be interpreted in a way consistent with the ECJ’s decision and the EU Working Time Directive and/or whether words should be added to the Working Time Regulations to ensure that this is the case;
  • what the correct reference period should be for calculating holiday pay.

The Employment Tribunal yesterday decided that:

  • the Working Time Regulations can be read to conform with the Working Time Directive and wording should be implied into the Regulations to achieve this. The Tribunal introduced into the Regulations an additional modification to the calculation of a week’s pay under Regulation 16 of the Working Time Regulations (which is inserted as a new Regulation 16(3)(e)), as follows:

“(e) as if, in the case of the entitlement under regulation 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purpose of s.221.”

  • This means that, where a worker’s remuneration includes commission determined by reference to sales achieved (as was the case for Mr Lock) his holiday pay will now be calculated in the same way as for a worker with normal working hours whose remuneration varies with the amount of work done – ie ‘a week’s pay’ will be calculated as the amount of remuneration for the number of normal working hours in a week calculated at the average hourly rate of remuneration payable in respect of the previous 12 week period.
  • This approach could mean that a worker might actually receive a higher level of pay than expected in the month in which he takes holiday and slightly reduced pay in the subsequent months. This will depend on how long it takes for commission earned under the applicable incentive scheme to be paid out. For the purpose of calculating holiday pay, the employer must have no regard to commission which is actually paid out in the normal course in the weeks during or after the holiday is taken but which is referable to work done in the weeks before the holiday absence. It must calculate the holiday pay simply by reference to the pay received by the worker in the 12 weeks before the period of holiday commenced. 
  • The Employment Tribunal confirmed that this approach only applies to Regulation 13 holiday, ie the four weeks holiday to which a worker is entitled under EU law and not the additional 1.6 weeks holiday to which an employee is entitled under Regulation 13A. This is consistent with the EAT’s determination on a similar point in Bear Scotland v Fulton - for our previous briefings on recent holiday pay cases click here and here