The recent line of holiday pay cases has led to widespread media coverage suggesting some employers’ payroll costs are due to soar. Businesses have therefore been eagerly awaiting the Employment Tribunal’s decision in Lock v British Gas, which has now been handed down on the question of whether commission structures will impact holiday pay. In short, many employers are to pick up a bill, but the question of quantum here is yet to be determined.

Summary

In our previous blog on this case, we described the decision of the European Court of Justice which established that, in some circumstances, a worker’s holiday pay should be calculated based on salary and commission payments, not just basic pay, where commission payments are “intrinsically linked” to the performance of tasks required to be carried out by a worker. The ECJ left it to the Employment Tribunal to decide the method of calculating commission payable to workers away on annual leave.

The case returned to the Tribunal in February this year, and in the Judgment handed down this week, the Tribunal has held that the Working Time Regulations 1998 should be interpreted so that an employee’s holiday pay includes an element of commission. A further Employment Tribunal Hearing will be held to determine the applicable reference period for calculation purposes (i.e., over what period a worker’s earnings should be averaged to calculate holiday pay) and how to quantify claims.

Facts

Mr Lock was a sales consultant with British Gas. Mr Lock’s wage was made up of basic monthly salary plus commission payments, which were calculated in accordance with the level of sales achieved. Commission earned in one month was paid in subsequent months. Accordingly, when on annual leave, Mr Lock received commission payments relating to his sales achieved in previous months. However, Mr Lock incurred a reduced income in the months following his annual leave because he had not generated any sales during his period of holiday. Mr Lock argued that the reduced income constituted a breach of the Working Time Regulations 1998.

The case was referred to the ECJ, which held that where a worker's remuneration includes contractual commission, which is determined by reference to sales achieved, a national law that calculates statutory holiday pay based on basic salary alone will be incompatible with the Working Time Directive.

The case therefore returned to the Employment Tribunal, to determine the extent to which the WTR 1998 could be read consistently with the EU law and, if not, whether words should be added to the WTR to ensure conformity.

Tribunal Decision

The Tribunal held that it was necessary to interpret the domestic legislation (i.e., the WTR 1998) to require that employers take results-based commission into account when calculating pay for annual leave. The Tribunal went on to decide that a conforming interpretation of national law could be achieved by adding a new sub-paragraph to the WTR 1998.

The new sub-paragraph provides that where remuneration includes commission or similar payments, employers should calculate “a week’s pay” for holiday pay purposes on the basis that remuneration varies with the amount of work done. In short, this will likely mean that under the WTR 1998, employers are now required to calculate the employee’s holiday pay by reference to the previous 12 weeks’ total earnings, including commission.

Unfortunately for employers, however, key issues have been set aside for determination at a later date, including what the correct reference period should be for calculating commission payments due during holiday (i.e., whether it should be more than 12 weeks). The issue before the Tribunal at this stage was purely conceptual, that is, how to resolve any potential conflict between EU and domestic law.

This means that a definitive conclusion regarding the reference period for calculation and how to quantify Mr Lock’s claim has been reserved for a future Hearing, and therefore employers cannot be assured just yet that all uncertainty in this area has been resolved.

Also, note that a further potential frustration for employers is the reference in the new WTR wording to both commission and “similar payments”. So while this case should ultimately provide clarity for employers on commission payments in particular, this change to the WTR could throw up a wealth of related claims on other types of remuneration.

A Note on Limitation Periods

Employers can take some comfort from the Deduction from Wages (Limitation) Regulations 2014, which came into force on 8 January 2015. The Regulations provide that for most claims for unlawful deductions, there is a new backstop period of two years. This will apply to claims concerning commission, holiday pay, bonuses, fees and other emoluments (but not other types of remuneration, such as statutory sick pay and statutory maternity pay). The Regulations will take effect for claims presented on or after 1 July 2015.