In a decision that will come as no surprise the Court of Appeal has confirmed that commission should be included in holiday pay. What is helpful for employers is the fact that the Court of Appeal ruled that in Mr Lock’s claim his commission should be calculated using the 12 week reference period provided in domestic legislation. What was less helpful was the fact the Court was unwilling to go any further than this and provide wider guidance on reference periods or what should be included as variable pay.
As many will be aware, since this case started life in 2012, Mr Lock was employed by British Gas as a salesman. As well as his basic salary, he was entitled to receive commission based on sales. Commission was paid in arrears and amounted to approximately 60% of Mr Lock’s total earnings. Mr Lock claimed that, as he could not earn commission whilst on holiday, he would lose income if he took annual leave. He therefore argued that commission should be included in his holiday pay. The case was referred to the Court of Justice of the European Union (CJEU), which held that commission payments should indeed be included in holiday pay calculations. However the way in which commission should be calculated was left to the national courts to decide. In order to give effect to the CJEU’s decision the tribunal was obliged to draft an additional section into the Working Time Regulations.
British Gas was unsuccessful in its appeal before both the EAT and the Court of Appeal. In dismissing the further appeal by British Gas the Court ruled that the tribunal had been correct to interpret the WTR as it did, albeit acknowledging that the form of the wording was too wide since the tribunal had referred to all forms of commission rather than the present case which dealt with contractual results based commission.
The Court dealt very briefly with the question of reference periods, confirming that in accordance with a previous tribunal decision in the Lock case that the appropriate reference period here should be 12 weeks, but declined to give wider guidance. During submissions the court had been asked to consider how employers should deal with one off bonus arrangements for bankers which are paid on an annual basis, or commission payments which are paid at different times of the year – should a different reference period be used? In response Sir Colin Rimer explained:
“In the case of the banker example, there may indeed be a question as to what his ‘normal remuneration’ is, and whether its calculation ought to reflect the fact of his annual bonus and, if so, how. There may also be questions as to what, in any particular case, is the appropriate reference period for the calculation of the pay. I say nothing about any of that. .. This judgment is, therefore, confined to Mr Lock’s case.”
Impact on Employers?
Any employer who operates contractual results based commission schemes similar to that of British Gas should (if they have not done so already) amend their holiday payment process to reflect a 12 week average reference period.
It is important to emphasise that this case only applies to contractual results based commission payments and does not cover the wider aspects of variable pay, particularly voluntary overtime or bonuses where uncertainty still remains.
Areas where further clarity would be welcomed:
- Voluntary overtime. Although several tribunal decisions have recently ruled that voluntary overtime should be included in holiday pay calculations we have yet to see this approach adopted by a court of a higher level, meaning that it would be binding on other employment tribunals.
- Bonuses. Should an annual bonus be included in variable pay? The hope of course is that a bonus by its very nature is not “normal pay” since it is given as a reward for high performance and is generally at the employer’s discretion. On the other hand, bonus payments which are not performance dependent and are in effect a top-up payment may well fall under normal remuneration. And then grey areas exist. What is the position when the bonus is paid according to company rather than individual performance where criteria are met on an annual basis?
- Reference periods. This case suggests that reference periods will need to be assessed on a case by case basis. While it would appear that in most cases the 12 week reference period outlined in the ERA should be used, this may not always be appropriate. The judgment certainly opens the door to the possibility that a longer reference period may be appropriate in other aspects of variable pay, such as bonus payments, or where fluctuating payments are made during the year.
What we do know …
- Non-guaranteed overtime – where the employee is obliged to do the work but there is no obligation on the employer to offer the work is covered by the definition of normal remuneration.
One further factor to consider before making any changes to your approach on holiday pay is the European dimension which cannot be overlooked. Now that we know that the Great Repeal Bill will be brought in - possibly by March 2019 - which will end the supremacy of EU law, cases like this which are reliant on the “conforming interpretation” of EU directives are highly likely to be vulnerable to legal challenge.