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Employment Matters

Holiday pay and commission: does Lock hold the key?
Employment Matters

Employment MattersIssue 4 | November 2016

Date
23 November 2016

Louise Blacker Managing Associate

In October, the Court of Appeal handed down its decision in British Gas v Lock. An important and well-anticipated judgment, it was hoped that it would shed new light on a complex technical issue that has been a headache for employers for many years.


Holiday pay and commission: does Lock hold the key?

In October, the Court of Appeal handed down its decision in British Gas v Lock.  An important and well-anticipated judgment, it was hoped that it would shed new light on a complex technical issue that has been a headache for employers for many years.  Ultimately, however, the Court of Appeal’s decision does not tell us anything new. It is limited to its facts and fails to provide crucial answers to the practical day-to-day questions faced by employers in calculating holiday pay.

The long-running case centres on Mr Lock, a former British Gas salesman whose commission payments made up around 60 per cent of his remuneration.  Back in 2012, he complained to an employment tribunal that he had suffered reduced income as a result of taking holiday. This was because he was unable to generate commission during his holiday and thus his earnings in the period following the holiday were affected. This, he said, was a breach of the Working Time Regulations (WTR); as his remuneration normally included commission, so should his holiday pay.

The employment tribunal referred the case to the European Court of Justice (ECJ), who held that it would be contrary to the Working Time Directive (distinct from WTR) to exclude commission that is directly linked to the work carried out from holiday pay, as to do so might deter a worker from taking their annual leave.

The case returned to the tribunal, who had to determine the extent to which the WTR could be read consistently with EU law, and if it could not, whether words could and should be added to the legislation to achieve that result. The employment tribunal decided that the proper course of action was to add words to the WTR to the effect that commission payments should be included in holiday pay (based on an average hourly rate of pay calculated over the 12 weeks before the holiday).  In doing so, the tribunal also relied on the earlier case of Bear Scotland in which the same result had been achieved in relation to overtime payments.  British Gas’ appeal was dismissed by the Employment Appeal Tribunal (EAT).

The main issue before the Court of Appeal was again whether the WTR could be interpreted as including commission in holiday pay, as required by the Working Time Directive.  Upholding the previous decisions of the tribunal and the EAT and dismissing British Gas’ appeal, the Court of Appeal held that the WTR could be interpreted in this way and that to do so did not involve any infringement of EU principles.  As Mr Lock’s commission was contractual and results-based, it should have been taken into account when calculating his holiday pay for the minimum four week holiday period required by the Working Time Directive (but not for the additional holiday period provided for in the WTR).

Disappointingly, the Court of Appeal refused to go any further. Firstly, it was very clear that the decision was confined to the specific circumstances of Mr Lock’s case and was not a general ruling that all commission payments should be included in holiday pay. Further, the court acknowledged that there were questions as to how the WTR interpretation might apply to other types of payments (for example a banker’s annual bonus), as to how the calculations should actually be made and what the appropriate reference period should be.  However, the court expressly declined to answer such questions. 

Whilst we have some more certainty as a result of this latest decision, this is of limited use, or comfort, to employers.  The case confirms the interpretation of the WTR (at least until there is a Supreme Court appeal as British Gas has sought leave to appeal the decision) but does not assist with the practical problems faced by employers.  Brexit could raise further questions because there may be no obligation to apply the WTR in accordance with European law once Britain has left the EU.

What should be included with holiday pay?

  • Compulsory or ‘guaranteed’ overtime? Yes.
  • ‘Non-guaranteed’ overtime, i.e. overtime that the employer can require the employee to work but which it has no duty to offer? Yes: Bear Scotland.
  • Voluntary overtime? Possibly. The recent (non-binding) employment tribunal case of Brettle v Dudley Metropolitan Council found that working voluntary overtime once every four or five weeks was enough to make the overtime payments part of normal pay (and therefore should have been included in holiday pay). 
  • Commission? Yes, where commission is contractual and results-based: British Gas v Lock.

Annual bonus payments? Currently untested. In British Gas v Lock, the CA specifically declined to address this point. However, there is a strong argument that most annual bonuses are sufficiently one off in nature to not form part of "normal pay", and tend to be unaffected by the taking of holiday.