Case update (1): Holiday pay and commission

holiday pay - deck chairIn our April 2015 Newsflash Holiday pay and overtime we updated you that the Tribunal has published its decision in the case of Lock v British Gas such that holiday pay should include an element for commission. Given the importance and complexity of this issue we explore the case here in further detail.

Summary: Can UK law on the meaning of ‘a week’s pay’ be interpreted in such a way as to conform with European (EU) law which requires that payments such as commission should be included in the calculation for holiday pay?

Yes, says the Tribunal in Lock v British Gas available here

Facts: Mr Lock was a salesman selling commercial products for British Gas. He received commission on a delayed basis, weeks or even months after he negotiated a particular deal. On average, his commission payments made up about 60% of his monthly earnings. Mr Lock took two weeks holiday over Christmas and New Year 2011-2012. His pay for December/January was not lower than usual, as he still had earlier commissions ‘coming through’. However, he argued that by taking holiday he was deprived of the opportunity to earn future commission and therefore his overall earnings were lower. Mr Lock brought a claim in the Tribunal, arguing that the reduced income amounted to a breach of the Working Time Regulations 1998 (WTR).

The Tribunal referred the case to the ECJ which accepted Mr Lock’s argument and held that his holiday pay should include a commission element. The ECJ held that where a worker’s remuneration includes contractual commission, determined with reference to sales achieved, EU law (the Working Time Directive) precludes a national law that calculates statutory holiday pay based on basic salary alone. If commission payments are not taken into account, the worker will be placed at a financial disadvantage when taking statutory annual leave; no commission will be generated during the holiday period. In such circumstances, the worker might be deterred from exercising the right to annual leave. This would be contrary to the EU law’s purpose.

The case was remitted back to the Tribunal following the ECJ’s decision and, just as significantly, following the EAT’s decision in Bear Scotland (see our November Newsletter Case update (1): Holiday pay and news).

The Tribunal had to determine the extent to which the WTR could be read consistently with EU law, and if not, whether words could and should be added in, interpreting those regulations so that the calculation of a week’s pay conformed with EU law. If not, holiday pay claims against private sector employers could not succeed until the law is changed by the Government.

Importantly, however, certain issues were not decided by the Tribunal in this hearing, but were instead set aside for a later date, namely to do with the construction of the commission scheme, the correct reference period and how to quantify the claim.

The Tribunal held that UK law can be interpreted so as to bring it into line with ECJ’s ruling. This could not be done by reading the law consistently with EU law (because the two laws were opposites). However, the UK law could be so interpreted by adding the following words to the WTR:

“… a worker with normal working hours whose remuneration includes commission or similar payments shall be deemed to have remuneration which varies with the amount of work done….”

The Tribunal found that the correct approach had been taken by the EAT in Bear Scotland (see above) which had held in that case that the WTR can and should be interpreted to conform with EU law.

The Tribunal therefore held that employers (including in the private sector) must bring commission payments into account when calculating holiday pay in respect of the four week entitlement under the WTR.

Implications:

This is not a surprising decision, particularly given the previous EAT decision in Bear Scotland (see our November Newsletter Case update (1): Holiday pay and news) to allow UK law to be interpreted to conform with EU law.

Nevertheless, this is a useful clarification of the specific position in relation to commission; that employers (including in the private sector) should bring such payments into account when calculating holiday pay, at least in respect of the statutory entitlement (i.e. the first four weeks).

However, it is worth noting that this decision may well be appealed. Further, as it a Tribunal level decision, it does not have to be followed. Therefore a different Employment Judge could reach a different conclusion on similar facts.   This means that employers who have not yet agreed the way forward with their staff have reason not to rush and may wish to wait to find out whether there will be an appeal first and the outcome of any higher level decision.

Another reason to watch this space on this case is that there will be further hearings in due course to deal with other issues, including how commission should be taken into account for the particular claimants in this case.