The Court of Justice of the European Union (CJEU) has handed down its decision in Lock v British Gas, holding that commission payments fall within the concept of normal pay and should therefore be taken into account when calculating the holiday pay to which a worker is entitled.  

Background

The EU Working Time Directive does not specify which elements of pay should be included when calculating statutory holiday pay. The  UK courts have, in applying the provisions of the Employment Rights Act 1996 (which contain the provisions setting out how a week’s pay should be calculated), taken a restrictive approach to date, and have specifically held that commission does not need to be included in such a calculation.

Facts in Lock

The sales force of British Gas are paid a basic salary plus commission on sales achieved. The commission is a significant element of pay and is paid at least weeks, if not months, after the sale is achieved by the sales consultant as there are a number of obstacles to be overcome, such as credit checks, before the sale is completed and the commission falls due.  

Mr Lock brought his claim because, although his pay whilst on annual leave included commission from sales achieved prior to his holiday, he received no commission in subsequent months in respect of any sales he could have generated whilst on annual leave.

CJEU decision

The CJEU considered that the key question is whether there is an intrinsic link between the work required to be done under the employee’s contract and the commission paid, and that the answer to that question is “yes”. Recognising that in the month at issue during which Mr Lock took holiday he appeared not to suffer a reduction in pay compared to months in which he was working and not taking holiday, the CJEU said:

“ ....it must be noted that, notwithstanding the remuneration received by the worker during the period in which he actually takes his annual leave, he may be deterred from exercising his right to annual leave, given the financial disadvantage which, although deferred, is nonetheless genuinely suffered by him during the period following that of his annual leave.”

In other words, whilst on holiday, Mr Lock was deprived of the opportunity to earn commission which must inevitably affect his earnings later on, and therefore created a disincentive for him to take annual leave. The CJEU considered it “irrelevant” that the reduction in remuneration occurs after the period of annual leave.

However, the CJEU has not given any specific steer regarding how holiday pay should be calculated, leaving that question for the national courts to determine. The CJEU said:

Accordingly, it is for the national court or tribunal to assess .... whether, on the basis of an average over a reference period which is considered to be representative, under national law, the methods of calculating the commission payable to a worker ...... in respect of his annual leave, achieve the objective pursued by Article 7 of Directive 2003/88.

The case will now go back to the Employment Tribunal which originally referred the case to the CJEU for a final determination.

Consequences of the decision

The CJEU’s decision could have a significant administrative and financial impact on employers whose remuneration structure includes commission payments, because in addition to a likely increase to the holiday pay bill in the future, workers could now make claims against their employers for historically having failed to include commission in their holiday pay.

What should affected employers do?

There are steps that employers could take now to address this issue, for example by amending contracts. However, many will choose not to, on the basis that it may still be some time before the Tribunals’ approach to this issue is settled. In particular, it is not clear precisely how the tribunal will determine how the payment should be calculated. For example, should it be over a 12 month reference period (as suggested by the Advocate General), or a shorter period, perhaps 3 months, in line with existing recognised practice in the UK?

The relationship between EU law and the UK

The Working Time Directive, and the case law which interprets it, do not bind private employers directly. However, UK legislation has to be interpreted in line with Directives “so far as possible”. UK courts and tribunals appear to increasingly take the view that it is possible to re-interpret UK provisions to comply with Directives, even where words have to be written in or existing words disregarded. There is, however, a limit, as UK legislation cannot be reinterpreted in such a way that it goes “against the grain” of the UK legislation.

Consequently, in order to give effect to Lock, Tribunals must be prepared to re-interpret the provisions of the Employment Rights Act 1996 (which contain the rules used to calculate a “week’s pay”). Employers may seek to argue that this would go against the grain of the legislation, and so we may see this point argued through the courts.

If Tribunals are prepared to uphold claims based on Lock, then, subject to any appeal, employers may face considerable exposure for historical claims. If not, then, again subject to any appeal, the historical element of those claims might instead become the liability of the Government for failing to implement EU law properly, though employers which are “emanations of the state” could face claims based on the Working Time Directive itself.

Other payments: overtime

Recent European case law has extended the scope for including other elements of pay when calculating holiday pay and suggests that components of pay which are intrinsically linked to the performance of tasks which the worker is required to perform under his contract, or which relate to his status, must also be included when calculating holiday pay.

In one case (Neal v Freightliner Limitedl), an Employment Tribunal has held that voluntary overtime should be included when calculating holiday pay. This case, and another which has been joined to it, are to be heard by the Employment Appeal Tribunal on 30 and 31 July 2014. In another case, the Employment Tribunal decided the other way, but that case was not appealed to the EAT.

Additional leave

The Working Time Regulations 1998 provide workers in the UK with 1.6 weeks’ leave and pay in addition to the four weeks provided by the Directive. This begs the question of whether the decision in Lock applies also to determine what counts as holiday pay for that additional 1.6 weeks. This is still undetermined and the subject of debate.