Lock v British Gas Trading Limited

A significant and costly decision for employers has been issued by the Court of Justice of the European Union (CJEU), after it ruled that holiday pay should include commission and other elements of variable pay. 

Employees who receive variable pay which is “intrinsically linked to their contract of employment” including overtime, shift allowances and offshore allowances should now be paid basic salary plus contractual variable pay during a period of annual leave.  We would recommend that employers take immediate steps to review their holiday pay arrangements and take legal advice before determining historic liabilities.

The case involved a British Gas salesman whose pay consisted of both basic pay and commission. While Mr Lock’s pay varied from month to month, on average he made up about 60% of his total remuneration in commission. Mr Lock was paid in arrears and suffered financial hardship in the months following a holiday period due to his inability to earn commission.   Mr Lock brought a claim for outstanding holiday pay in the Employment Tribunal, which referred the matter to the CJEU.

The Employment Tribunal asked the CJEU whether or not commission should be included in holiday pay and, if so, how the payment should be calculated. Although the CJEU’s decision makes it clear that commission should be included it stated that the method of calculation should be determined by national law. It remains to be seen whether or not the Employment Tribunal will take the, perhaps, obvious approach and calculate this figure by using average variable pay over a year.

Agreeing with the Advocate General’s opinion issued in December last year, the CJEU said that the purpose of holiday pay is to put a worker in the position they would have been, had they been at work. As such this should include pay which is “linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment.”  If variable pay was not included, and so workers were paid significantly less during a period of annual leave, then it was concerned that this would deter employees from actually taking their holidays.

Depending on pay arrangements, this decision may have significant financial implications for employers and will also involve changes to payroll systems for holiday pay. In addition to the immediate difficulties this case presents, there is the additional concern regarding historic liabilities. Employees could bring deductions from wages claims seeking to recover sums from as far back as 1998 when the WTR 1998 were introduced.  There may be ways to limit the scope of the exposure and we would therefore recommend that you take advice before dealing with this aspect. Additional domestic cases dealing with other aspects of variable pay including non-contractual overtime are due to be heard by the EAT later this year.