The Employment Appeal Tribunal (EAT) has held that holiday pay must include commission payments. In reaching its decision, the EAT applied the European Court of Justice's (ECJ) ruling on this issue and interpreted domestic UK law in a way that conforms with EU law.

What triggered the case?

Mr Lock was employed by British Gas as a salesman. His remuneration package included a basic salary plus commission, which was calculated based on the number and type of contracts he secured from customers. When Mr Lock went on holiday, British Gas would only pay him basic pay, which was significantly less than his usual salary.

Mr Lock issued a claim against British Gas in 2012 and claimed that his holiday pay should include a sum representing the commission he would normally earn whilst at work.

What is the law?

The European Working Time Directive (EUD) provides that workers must have the right to at least four weeks' paid annual leave. However, it does not specify how holiday pay should be calculated. In the UK, the Working Time Regulations 1998 (WTR) implement the EUD and provide that holiday pay, for a worker who works "normal working hours", is calculated on basic salary only.

Despite the clear wording of the WTR:

  1. in the case of Bear Scotland1, the EAT held that the WTR can and should be interpreted to conform with the EUD, and that holiday pay must reflect a worker's "normal remuneration", which includes non-guaranteed overtime; and
  2. on referral, the ECJ ruled that holiday pay under the EUD includes commission, to ensure workers are not discouraged from taking annual leave2.

In Lock, the employment tribunal (ET) adopted the approach taken by the EAT in Bear Scotland and held that holiday pay includes commission . The ET also held that it was necessary to read the WTR in a way that conforms with EU law, even if this requires the tribunal to imply words into the WTR.

British Gas appealed the ET's decision.

What did British Gas argue?

In its appeal, British Gas argued that:

  1. Bear Scotland was wrongly decided – adding or implying words into UK legislation to conform with EU law amounted to "judicial vandalism"; and
  2. Bear Scotland, a case on non-guaranteed overtime, should not have been applied to a dispute relating to commission because "commission and non-guaranteed overtime are dealt with under different provisions which use different language".

What did the EAT decide?

The EAT dismissed British Gas's appeal and held that:

  1. the WTR can and should be interpreted in line with the requirements of the EUD and ECJ's ruling; and
  2. the ET was right to adopt the Bear Scotland approach as there is no difference in principle between non-guaranteed overtime and commission so far as holiday pay is concerned.

British Gas has requested permission to appeal to the Court of Appeal.

What is still unclear?

The EAT's judgment does not clarify how commission or non-guaranteed overtime should be factored into the calculation of holiday pay. To date:

  1. the Employment Rights Act 1996 uses a reference period of the last 12 weeks to calculate pay where pay varies according to the amount of work done or the time of work;
  2. the Advocate General suggested a reference period of 12 months;
  3. the ECJ held that national courts must determine a reference period that they "consider to be representative"; and
  4. the ET has suggested that the reference period for calculating holiday pay should be the period of 12 weeks immediately before the holiday (excluding any weeks where no remuneration was paid for any reason).

The ET will now determine how much holiday pay and commission Mr Lock is entitled to in a separate hearing, which should provide helpful guidance on how and when commission is factored into holiday pay.

What does this mean for employers?

The EAT's decision is not surprising and now leaves little doubt that both commission and non-guaranteed overtime are included in the calculation of holiday pay. In light of the EAT's decision, employers should consider reviewing their current holiday pay allowances in respect of overtime and commission. Failing to include such payments may lead to a deluge of unlawful deductions from wages claims. Fortunately, employers may benefit from some protection under:

  1. the Deduction from Wages (Limitation) Regulations 2014, which have imposed a two-year limit on most claims for backdated unlawful deductions from wages since 1 July 2015; and
  2. the "three month rule" in Bear Scotland, under which an employee will lose the right to claim historical arrears of holiday pay if there is a gap of more than three months between underpayments or deductions.

Hundreds of holiday pay claims issued by employees after the ET's decision have been stayed pending this decision. As British Gas intends to appeal the EAT's decision, employers facing holiday pay claims should request the stay to remain in place until the Court of Appeal has issued its ruling. Meanwhile, the EAT is expected to consider an appeal by employees seeking to challenge the "three month rule" established by the ET in Bear Scotland.

Although the prospect of the EAT's decision being appealed means that this area of law is still uncertain, it is our view that the Court of Appeal will likely uphold the current position in light of the three decisions made before it. As such, it has never been more important for employers to audit their holiday pay arrangements, identify areas of risk, and plan how to address these. Employees will no doubt feel more optimistic about issuing holiday pay claims, which could in turn give rise to significant costs for unprepared employers.