A question for recruiters – do you know what you are required to pay your consultants during their annual leave? Base salary? Commission? Both? In Lock v British Gas Trading Ltd¸ the courts (both European and domestic) considered just that. The decision will be particularly relevant for those consultants who are remunerated largely through commission.
A piece of European Law, the Working Time Directive (the "Directive"), gives workers the right to at least four weeks of paid annual leave. The Working Time Regulations (the "Regulations") are the domestic legislation that give effect to the Directive in the UK. However, neither the Directive nor the Regulations explain the way in which pay for that leave should be calculated. Until recently, domestic law provided that where a worker works 'normal working hours', the worker would generally be paid at the rate of a week's pay.
Mr Lock was not happy with the status quo. He was employed by British Gas as an energy consultant. He received a basic salary, but his commission on sales made up approximately 60% of his income. Mr Lock argued that his income was adversely affected as a result of taking annual leave because he could not secure the sales (and by extension commission) that he would have otherwise earned had he not been on holiday. This, he argued, was a breach of his rights as he was disincentivised from taking annual leave.
In this context, the European Court of Justice considered whether commission payments should be included in holiday pay. It noted that the purpose of the Directive was to ensure that a worker would not suffer a financial disadvantage by taking annual leave. Accordingly, commission payments should be taken into account where a worker's normal remuneration package includes a contractual entitlement to commission.
The case was referred back to the Employment Tribunal (the "Tribunal") to determine whether the Regulations were consistent with European law. The Tribunal considered that domestic legislation and European legislation were inconsistent and that the Regulations should be interpreted to allow for the calculation of a week's pay to take into account the fluctuations caused by commission.
Unfortunately, the Tribunal offered little guidance to employers as to how to calculate a worker's holiday pay entitlement. In Lock, it was held that holiday pay (including commission) should be calculated by reference to Mr Lock's average weekly pay over the previous 12 weeks. However, this case was very fact specific.
Mr Lock earned commission on a very regular basis and a day not in the office was likely to have a direct impact on his future earning potential. There was little doubt that it formed part of his 'normal remuneration'. The position is less clear in circumstances where a worker earns commission less frequently and with less certainty, or where the commission is non-seasonal. It is possible that a recruitment consultant who systematically places candidates throughout the year (eg. in temporary roles) is entitled to an element of commission in his holiday pay whereas a consultant who places candidates less regularly (eg. in executive roles) is not. Lock has been appealed to the Employment Appeal Tribunal, so the legal position is far from settled.
Employers should note that a worker will only be entitled to the commission element of annual leave pay in respect of the four weeks' holiday due under the Directive. Any enhanced entitlement (whether under the Regulations, which give an additional 1.6 weeks' leave, or the individual's contract) need only be paid at basic salary.
Recruitment companies may want to start thinking about tactics around the timings of the commission element of holiday pay in an attempt to defeat any claims for deductions stretching back over a prolonged period.
The government has also passed legislation which limits an employer's liability in relation to holiday pay claims: for claims lodged after 1 July 2015, workers will only be able to look back two years. This should provide some additional comfort to recruiters.