SUMMARY: Employers will need to take into account commission payments when calculating holiday pay.
The Employment Appeal Tribunal (“EAT”) has handed down its decision in the case of British Gas Trading Limited v Mr Z J Lock & Secretary of State for Business, Innovation and Skills.
The issue for the EAT, in the Lock case, was whether holiday pay must take into account elements of normal pay such as commission. In October 2014, the EAT was already scrutinising how employers calculated holiday pay and ruled in Bear v Fulton that employers must take into account non-guaranteed overtime payments when calculating pay for the basic four week holiday entitlement under regulation 13 of the Working Time Regulations 1998. Unsurprisingly, in Lock, the EAT has decided that workers’ remuneration for annual leave periods must also include both commission and basic pay, if this is what they are normally paid.
Under the Working Time Regulations 1998 (“WTR”) all workers have a statutory holiday entitlement of 5.6 weeks’ annual leave and they are entitled to be paid at the rate of a week’s pay for each week of statutory holiday. This entitlement is pro-rated for part-time workers.
The WTR derives from the European Working Time Directive (“WTD”), however, the WTD only entitles employees to 4 weeks’ holiday, which is 1.6 weeks’ less than the WTR entitlement.
The Facts of the Lock case:
Mr Lock, who was employed by British Gas as a salesman, had a remuneration package that included a basic salary plus commission which was based on the number and type of contracts he persuaded customers to enter into. However, the remuneration that he received when he took holiday consisted of basic salary and any commission which he had earnt prior to his leave commencing but that fell due during his period of holiday. This meant he could not earn commission when he was on leave and, as his basic pay was significantly less than his normal pay, this was a disincentive to take annual leave.
In April 2012, Mr Lock claimed to an Employment Tribunal (“ET”) that the failure to pay him commission for the period that he was on holiday leave was contrary to the WTR. As the WTR derive from European law, the ET referred the matter to the Court of Justice of the European Union which ruled that the WTD provides that results based commission should be taken into account when calculating holiday pay. The ET subsequently held that the WTR could be interpreted so as to include commission payments in the calculation of holiday pay for the four weeks’ annual leave provided by Regulation 13 of the WTR.
The ET’s decision was appealed by British Gas. The EAT dismissed the appeal.
Implications for businesses:
- If workers’ remuneration ordinarily comprises basic pay and commission businesses will need to calculate holiday payments for a worker’s 4 weeks’ statutory holiday entitlement (pro-rated for part-time workers) so that it includes commission which would have been earned but for the taking of leave.
- Businesses may choose to pay the remaining 1.6 weeks’ statutory entitlement excluding commission, which would have been earned but for the taking of leave.
- Failure to include commission when calculating holiday pay for the 4 weeks’ entitlement means the worker may apply to the ET for any underpayments provided that the claim is made within 3 months of that underpayment being made. If a claim involves a series of underpayments, any claims for the earlier underpayments will fail if there has been a break of more than three months between such underpayments.
- Any claims presented to the ET for a series of backdated deductions from wages, including any shortfall in holiday pay, will be limited to cover a period of a maximum of 2 years.
British Gas Trading Limited v Mr Z J Lock & Secretary of State for Business, Innovation and Skills UKEAT/0189/15
For more details about the issues in this article or if you would like advice on how to calculate holiday pay, please contact:
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This update is for general guidance only and does not constitute definitive advice.