We look at the Leicester employment tribunal's recent decision in the case of Lock v British Gas Trading Ltd and another (ET/1900503/2012) on whether an employee's holiday pay has to contain an element for commission. Whilst the recent decision leaves some questions unanswered, it provides confirmation of the key legal principle on holiday pay and commission.

Background

Regular readers of our updates (and most HR professionals) will be aware of the case of Lock v British Gas. We have previously reported on the European Court of Justice's decision that employers need to include amounts in workers' holiday pay to compensate them for the loss of commission they would have earned whilst on holiday. The ECJ decided that this was necessary because, if commission was not included in the calculation of holiday pay, that could discourage workers from taking annual leave. This was because it would mean they earned reduced pay on their return from leave.

The ECJ's decision left a number of questions unanswered. One of those was whether UK law could be interpreted to give effect to the decision and another was how holiday pay should be calculated in the UK to include such compensation for lost commission. These issues were referred back to the Leicester employment tribunal and we now have a decision that answers the first of these questions.

The law

There have been a number of important decisions on holiday pay in recent years and these arise from the fact that there is a difference between the wording of UK law on holiday pay and the European approach as set out in the Working Time Directive (the Directive) and the case law of the ECJ. 

The ECJ has consistently held that a worker must receive his or her 'normal remuneration' whilst absent on annual leave. However, the Working Time Regulations (WTR), which implement the Directive in the UK, use the concept of a 'week's pay' to calculate an employee's pay during annual leave. The rules on calculating a week's pay are complex and the calculation depends on whether the worker has normal working hours and whether his or her pay varies according to the amount of work done or the time at which it is done.

For workers with no normal working hours, variable elements of pay such as commission have always had to be included in a 12-week average used to calculate holiday pay. The difficulty arises with employees who do have normal working hours but who also receive variable amounts.  If the variable amounts relate to the amount of work done (ie piece work) they have to be included in the calculation of holiday pay. However, as commission varies according to results achieved (rather than the amount of work done), UK law did not require it to be taken into account.

The facts

This caused a problem for employees such as Mr Lock, who received around 60% of his total remuneration in commission. Whilst he was on annual leave he was paid basic pay and would also continue to receive commission payments based on sales achieved prior to him going on leave. However, he could not earn further commission whilst off and that meant that there would be a reduction in his pay at some point after he returned from leave. He therefore brought a claim in the employment tribunal alleging that he had been underpaid holiday whilst on annual leave.

Employment tribunal decision

When Mr Lock's claim first went before the Leicester employment tribunal, it referred his case to the ECJ for a view on whether European law required him to be paid for commission whilst on annual leave. The ECJ subsequently decided that a worker's holiday pay did need to include an amount to compensate him for the loss of the ability to earn commission whilst on annual leave. The case was then referred back to the Leicester tribunal to decide whether UK law could be read so as to give effect to the ECJ's decision or, alternatively, whether the Government would need to amend the WTR to deal with this issue.

In previous cases relating to bonuses, and also on the right to accrue holiday whilst absent on sick leave, the UK employment tribunals have had little difficulty reading words in to the WTR to give effect to decisions of the ECJ. It is therefore unsurprising that, on 23 March 2015, the Leicester employment tribunal decided that it was possible to read in words to the WTR to give effect to the ECJ's decision in Lock. It considered a string of cases relating to how the UK courts and tribunals should deal with decisions of the ECJ. The key principle from those cases was that words should be read into UK legislation to give effect to EU law unless there was evidence of a clear intention on the part of the UK Government to take a different approach. There was no such evidence here so the tribunal had to read words in to the WTR.

It concluded that the WTR should be interpreted so that, for the four weeks' annual leave entitlement derived from EU law, a worker with normal working hours whose remuneration includes commission or similar payments shall be deemed to have remuneration which varies with work done. This means that commission payments need to be taken into account when calculating holiday pay.

What this means for employers

The key point from this case is that it is now clear that workers can bring claims against their employers if they work normal working hours and earn commission but their holiday pay does not include an element to compensate them for loss of that commission whilst on leave.  However, there are a number of important limitations on this of which employers need to be aware:

  • All parties in the Lock cases agreed that the decision only applies to the minimum of four weeks' annual leave mandated by EU law.  It does not therefore apply to the 1.6 weeks' additional annual leave granted to workers by the WTR or to any contractual annual leave.  Those other types of annual leave will be dealt with in line with the terms of a worker's contract.
  • As a result of the Bear Scotland decision on overtime and holiday, a three-month break between periods of leave will break the chain in a 'series of deductions'.  This should limit the scope of unlawful deduction from wages claims for back-dated holiday pay, as such claims cannot go back beyond any three-month gap between allegedly underpaid holiday payments.  Whilst there are arguments that Bear Scotland may be wrongly decided on this point, we understand that the decision is not being appealed.
  • The scope for unlawful deduction from wages claims will be limited further as a result of amendments the Government is making to legislation dealing with unlawful deduction from wages claims with effect from 1 July 2015.  Those amendments mean that claims issued from that date will be limited to a maximum period of two years' back pay.

Employers with commission schemes should now consider how they will deal with the decision.  In particular it may be necessary to be clear on when in a holiday year workers will be deemed to take the four weeks' EU leave. Employers who carry out regular reviews of their commission schemes may want to look at whether changes can be made to neutralise the potential costs of the Lock decision, taking into account any contractual limitations on this. 

Additionally, employers may be concerned about workers abusing the decision by, for example, deliberately taking holiday at quiet times of the year so as to increase their pay overall. Such employers may wish to look at any rules they have on when workers can take their holiday.  On the other hand, they may take the view that such an approach would be positive as it encourages workers to take holiday during quieter and less profitable times of year.

The unanswered questions

The tribunal's decision does leave some questions unanswered, which are to be determined at a later hearing. These are:

  • Whether British Gas's commission scheme did in fact adequately compensate Mr Lock during periods of annual leave. Whilst this will turn on the precise terms of British Gas's scheme, the ultimate decision on this may give other employers helpful guidance on the design of their own schemes.
  • The reference period in respect of which commission payments need to be taken into account when calculating the holiday pay of an employee who earns commission. Whilst the tribunal did not expressly decide this, the effect of the words it read into the WTR is that the calculation seems likely to involve working out an average hourly rate of pay (including commission) over a 12-week reference period leading up to the date on which holiday is taken.
  • Some employers may think that 12 weeks is not an appropriate period and may instead consider a different period, such as 12 months. The ECJ decision in Lock may give them some comfort because it stated that the national court needs to calculate the average over a reference period "which is considered to be representative".  Dependent on the business, 12 weeks may not be 'representative'.  Whether the WTR  can be read so as to insert a different reference period may end up being a decision for another tribunal at a later date.