Employers must include commission in holiday pay calculation

22 February 2016

In the long running British Gas v Lock case, the Employment Appeal Tribunal has dismissed the appeal from British Gas, however we must await the outcome of further cases before we know exactly how to include commission when calculating holiday pay.

The Employment Appeal Tribunal (EAT) dismissed the appeal made by British Gas against Lock and held that there is no difference in principle between payment for non-guaranteed overtime and payment in respect of commission so far as annual leave pay is concerned.

The non-guaranteed overtime relates to the case of Bear Scotland v Fulton where in October 2014 the EAT ruled that EU law can be read across into the Employment Rights Act 1996 so as to require employers to 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.

Background

Mr Lock was at the material time employed by British Gas as a salesman. His remuneration package included a basic salary plus commission which was based on the number and type of contracts he persuaded customers to enter into; in other words it was results-based commission and did not depend on how much work was done.

Mr Lock took a number of days’ holiday to which he was entitled, however, the remuneration paid to him during holidays consisted only of basic salary and any commission which had been earned earlier but happened to be paid at that time. Since he was not working he could not earn any commission while he was on holiday.

He complained to the Employment Tribunal that that method of calculating his holiday pay was contrary to the requirements of section 221 of the Employment Rights Act 1996 and regulation 16 of the Working Time Regulations 1998, as amended. He submitted that the domestic legislation could be, and therefore had to be, interpreted in a way which conforms to the requirements of Article 7 of the European Union’s Working Time Directive.

There had previously been a reference made by the Employment Tribunal to the Court of Justice of the European Union, which held that Article 7 of the Directive requires results-based commission to be taken into account when calculating an employee’s holiday pay. In March 2015 the Employment Tribunal then held that it was possible to interpret the domestic legislation in a way which conforms to the requirements of the Directive by reading words into regulation 16.

British Gas subsequently appealed.

CIPP comment Although the Employment Appeal Tribunal (EAT) has at last handed down its decision in this case, employers are still left with uncertainty as the reference period to be used to calculate holiday pay still needs clarification. The CJEU did say in the Bear Scotland case that it is for the national court to assess the link between the various components which make up the total remuneration of the worker and that assessment must be carried out on the basis of an average over a reference period which is judged to be representative- leaving it somewhat open to interpretation. We remain hopeful that The Department for Business, Innovation & Skills (BIS) will be in a position to develop long awaited guidance once the outcome of further cases are decided later in the year.

The CIPP run a practical half day course which includes an overview of the legal framework that governs holiday pay and entitlement, as well as worked exercises to explore the calculations thoroughly. This course will always include the most up to date information to account for on-going case law. Visit the training area of our website for full details.