Does holiday pay have to include commission?
Employers should be acting now, reviewing how results based commission schemes operate within their business and how to apply this to holiday pay.
In the long running case of Lock and another -v- British Gas Trading regarding the payment of commission during periods of holiday, British Gas has recently been refused leave to appeal by the Supreme Court.
Over a period of approximately five years there has been an on-going argument in this case as to whether holiday pay should include commission.
Mr Lock was a sales person who participated in his employer’s results based commission scheme whereby he was rewarded when a customer started to purchase their gas from British Gas. As he did not generate new business while on leave, his remuneration suffered in the period after his holiday. He argued therefore that his holiday pay should reflect what he would have earned through results based commission.
A referral was made by the Employment Tribunal to the Court of Justice for the European Union (CJEU) for clarification on whether or not it was a breach of the Working Time Directive for the Working Time Regulations 1998 to limit the calculation of a week’s pay for annual leave to basic pay and to exclude commission.
The CJEU held that where a worker’s remuneration includes contractual commission determined with reference to sales achieved, a worker’s commission payments must be included in the calculation of holiday pay and it cannot be based on basic pay alone. The case then returned to the UK courts to the Employment Tribunal, appealed to the Employment Appeal Tribunal and further appealed to the Court of Appeal.
In October 2016 the Court of Appeal ruled that holiday pay must include compensation for any results-based commission that would ordinarily be earned by a worker.
The refusal for leave to appeal by the Supreme Court in February 2017 now brings this case to a close, save for a decision by the Employment Tribunal on how much should be paid to Mr Lock. British Gas will now have to compensate Mr Lock and it is understood approximately 1,000 other employees who have been waiting on the outcome of this case.
What does this mean for employers?
As the law stands this means that employers’ do have to pay commission as part of holiday pay to reflect results based commission ‘normally’ earned. However, the Court of Appeal confirmed that this only relates to the first four weeks’ holiday in each holiday year (assuming that an employee works 5 days per week this would be 20 days) not the additional 1.6 weeks’ leave and/or any contractual leave over and above this. However, whether you may have a separate contractual obligation will depend upon individual contract terms which should be reviewed before making any changes.
What remains unclear is how this pay should be calculated as no definitive ruling has been given on this. It is suggested that this should be done by averaging pay over a given reference period, usually the 12 weeks’ prior to the leave being taken but this is by no means clear. British Gas may settle this point without the need to go to court but if it does not, it is hoped that the tribunal should provide some much needed guidance on how exactly holiday pay including commission should be calculated. Further guidance is eagerly awaited!
Employers should be acting now if they have not already done so, reviewing how results based commission schemes operate within their business and how to apply this to holiday pay.
Depending upon which way Brexit goes this could have an effect on this decision. A ‘hard’ Brexit route could threaten this right since the WTR, the law at the centre of this case, stems from the European Union. However, given the governments’ approach to workers’ rights, it seems that any dramatic changes would be unlikely.
As a note of caution, you should be careful when making any holiday pay changes as this could affect contractual terms and give rise to complex issues around such changes as well as potentially causing you greater contractual legal obligations should the law change in the future. We would recommend taking legal advice before making any such changes.
If you would like further advice on holiday pay and commission please contact Louise Brenlund on 01622 776405.