This week, the Employment Appeal Tribunal ("EAT") have confirmed that, when calculating holiday pay, employers must include commission.

The Case: Lock v British Gas Trading Ltd (2015)

Mr Lock was employed by British Gas as a sales representative whose remuneration package comprised his basic pay plus commission (based on the numbers and types of contracts customers entered into). However, when Mr Lock was on annual leave, he was paid basic pay only, which was significantly less than his usual earnings.

In this long running tribunal case, which had already been referred to the European Court of Justice ("ECJ") for clarification, Mr Lock had argued that this substantial drop in his usual earnings was a disincentive to taking annual leave. This potential deterrent to exercising the right to take annual leave would be contrary to the European Working Time Directive's purpose. The ECJ determined that, where commission was directly linked to the work carried out, it should be taken into account when calculating holiday pay and referred the case back to the tribunal to apply its ruling to the UK law.

In March 2015, the tribunal found in favour of Mr Lock, implying additional words into the Working Time Regulations to make them conform with the EU Directive.

On considering British Gas' appeal against this decision, the EAT took the same approach that it took in the Bear Scotland case concerning the inclusion of non-guaranteed overtime payments in the calculation of holiday pay. It confirmed its ruling that UK law must be interpreted in such a way that it conforms with EU legislation, even if that means implying additional wording into the Regulations. The response to the suggestion that this would be "judicial vandalism" was that the intention of Parliament when writing the UK Regulations was to implement the EU Directive. Therefore, if the wording was not expressly in line with EU law, the courts would be giving effect to Parliament's original intention by interpreting it as if it was.

What does this mean for Employers?

This is an extremely important decision and will be influential in the outcome of the thousands of other cases on hold pending the outcome of Lock.

Following Lock and Bear Scotland, it would be prudent for employers who pay commission or overtime to conduct a review of how they remunerate employees during annual leave.  There seems to be little doubt remaining that, when calculating holiday pay, employers need to take into account elements of pay such as commission, guaranteed and non-guaranteed overtime. Whilst this is going to be a huge additional expense for some employers, if they fail to calculate holiday pay in this way, they face the risk of opening the floodgates to unlawful deductions from wages claims.

What remains unclear however is the reference period which should be used to calculate holiday pay in these cases.  Somewhat unhelpfully, the EAT offered no guidance on this.  It is likely that a further tribunal hearing will be required to determine Mr Lock's compensation, which may provide some guidance on the reference period to be used (albeit that such a decision will not be binding).  There is also, of course, the possibility of a further appeal by British Gas to the Court of Appeal, which may allow for consideration of some of these outstanding issues at an appellate level.

Therefore, whilst employers would be well advised to review their procedures, they should also be alive to the likelihood of needing to revisit them when further guidance is provided.