The ever-developing case law on holiday pay continues to pose a challenge for employers.  In this article, we look at one of the most recent cases in this area, Lock v British Gas Trading Ltd and others C-539/12.  This ECJ decision is likely to mean that employers will need to include amounts in holiday pay to compensate employees for lost commission that they would have earned whilst on holiday.

Background

A worker's right to take paid holiday is set out in the Working Time Directive (the Directive), which is implemented in the UK by the Working Time Regulations 1998 (the Regulations).  The Directive states that workers must receive "normal remuneration" while on holiday but does not specify how this should be calculated and this is left to member states to decide.  The Regulations state that holiday pay should be calculated on the basis of a week's pay.  How a week's pay is calculated depends on whether the worker has normal working hours and whether their pay varies according to the amount of work they do or the time at which they do it.

If an employer fails to pay the correct amount of holiday pay, the worker can bring a claim for unlawful deduction from wages for backdated holiday pay or a breach of the Regulations.  The claim has to be brought within three months of the last deduction, which is the date of the last incorrect payment.  If the worker has received an incorrect sum for holiday every year he may be able to claim holiday pay going back over a number of years.  However, such a claim would be based on the employee having suffered  a 'series of deductions' and therefore an employee could not claim for holiday pay any further back in time than a holiday year in which he had received the proper holiday pay due, even if there were earlier incorrect payments.

A number of recent cases have looked at whether variable components of pay such as overtime, allowances, bonuses and commission should be included in holiday pay.

Facts

Mr Lock was employed by British Gas as an internal energy sales consultant and his role was to sell British Gas's energy products to business customers.  His pay comprised basic salary and a commission element, which was calculated on sales achieved and paid monthly.  The commission was paid several weeks or months after a sale was concluded and made up over 60% of Mr Lock's total remuneration.

The effect of these arrangements was that, when Mr Lock took a period of annual leave from 19 December 2011 to 3 January 2012, he received basic pay for the period he was off plus some commission earned before his holiday.  However, because he was not at work, he did not have the opportunity to build up further commission over the period of his leave.

The absence of the ability to earn commission during the period he was on annual leave meant that Mr Lock earned less in the following months than he would have done had he not taken any leave.  He issued a claim in the employment tribunal for outstanding holiday pay for the period he was on leave.

The employment tribunal decision

The tribunal decided it was necessary to refer the case to the ECJ and it stayed the proceedings.  The question it asked the ECJ was whether a worker's holiday pay should include an amount to compensate him for the commission he would have been able to earn but for being on annual leave.  Additionally, it sought a view on how any such payment had to be calculated if it was required.

The Advocate General's opinion

In the ECJ, an Advocate General gives an opinion after the hearing of the case, which is usually followed by the court.

The Advocate General concluded that holiday pay for an employee in Mr Lock's position should include compensation for commission he would have earned but for being on annual leave.  The Advocate General looked at previous ECJ case law, which provided that workers' pay for periods of annual leave must be at their normal remuneration for the period in question.  The purpose of holiday pay was to put employees in a position comparable to the position they would have been in if they had been at work during the holiday, otherwise they might be deterred from taking leave.

The Advocate General looked at the previous case of Williams and others v British Airways plc C-155/10, in which the ECJ concluded that certain allowances payable to airline pilots to compensate them for time spent flying and away from home had to be included in holiday pay.  The Advocate General concluded that the Williams case showed that, where there was an intrinsic link between performance of work and remuneration, that remuneration should be included in pay for annual leave.

Based on the trends established in previous case law, the Advocate General concluded that the commission was directly linked to work personally carried out by Mr Lock and it must therefore be included in the remuneration to which he was entitled during periods of annual leave.  In particular he concluded that whilst commission might fluctuate, it had a sufficient degree of permanence to be regarded as forming part of remuneration and therefore needed to be included in pay for annual leave.

British Gas had argued that it had taken into account the fact that employees could not build up commission during annual leave when setting the rate at which commission would be paid and their sales targets.  The Advocate General rejected this argument and stated that such an arrangement would amount to rolled-up holiday pay, which the ECJ had previously held to be unlawful.

The ECJ's decision

The ECJ came to the same conclusion as the Advocate General  (whilst only making limited reference to his opinion) and held that the commission earned by Mr Lock for the sales he secured for British Gas was intrinsically linked to his role as a salesman, which meant that an element of commission had to be included in his holiday pay.  The primary reason for the ECJ's decision was that it viewed the inability to earn commission during annual leave as a disincentive to take annual leave and it is a fundamental principle of European law that workers must not be deterred from exercising their right to annual leave.

The court therefore decided that Mr Lock's holiday pay had to include three components:

  • his basic pay
  • any commission falling due for payment while he was on annual leave and
  • an amount equal to the average amount of commission he would ordinarily earn while working.

The ECJ held that it was for the national court to decide how the amount needed to compensate workers for lost commission should be calculated and this issue will now go back to the Leicester employment tribunal to decide this point.

What does this mean for employers?

If the UK Employment Tribunals follow it, this decision will have a significant impact on employers who operate commission schemes and potentially any other remuneration or bonus scheme that is related to individual performance.  Such employers could face unlawful deductions from wages claims from employees who earn commission, seeking additional commission payments for periods of annual leave already taken.

The ECJ's decision will not automatically apply, at least to private sector employers, but if an Employment Tribunal feels able to read words in to the Regulations to give effect to the decision then it will effectively become part of UK law.

If so, employees may be able to bring claims for unpaid holiday pay going back over a number of years and we will need to wait for decisions from the Tribunals to see whether they take a pragmatic approach and limit how far back employees' claims can go.  There may be practical problems if employers do not have payroll records going back as far as the holiday year an employee is claiming unpaid holiday pay from.  However, employees will not be able to claim back pay for holiday beyond any year in which they were actually paid the right amount of holiday pay and it will therefore be important to examine an employee's pay and work history very carefully before paying out on claims.

Employers who operate commission or bonus schemes will need to decide whether they want to change their practice now or wait until we know how the UK Tribunals interpret the decision.  If they do want to change their practice they a will need to include an element in holiday pay to cover commission that the employee would have earned while on annual leave.  It may be advisable for such employers to revisit the terms of employees' contracts so as to set out how employees' remuneration for commission during annual leave should be calculated.

Additionally, this ruling could make holiday requests more difficult to manage.   Employees could benefit financially from taking holiday during quiet periods for sales and employers may find it difficult to manage competing holiday requests if that is the case.

Finally, there may be an argument that the ECJ's decision only applies to the minimum of four weeks' holiday a year that are prescribed by EU law.  It may therefore be possible to avoid compensating employees for lost commission during contractual annual leave and the 1.6 weeks' additional annual leave granted under the Regulations but that may be difficult to operate in practice.