Results-based commission must be taken into account when calculating holiday pay
The Employment Appeal Tribunal’s decision on Lock v British Gas has just been released. It is bad news for employers.
Under European law (the Working Time Directive) workers are entitled to receive 4 weeks paid annual leave per annum.
Under English law (the Working Time Regulations) workers are entitled to receive 5.6 weeks of paid leave per annum. This is comprised of 4 weeks European leave and an additional 1.6 weeks leave to effectively represent the equivalent of bank holidays and thus is more generous.
The Regulations do not specify how this should be calculated. The Employment Rights Act 1996 states a worker should be paid a week’s pay for a week’s leave. The question in the Lock case was whether a week’s pay should be based on what an employee normally earned (including commission) or what they actually earned (just basic pay) during the holiday leave period.
Mr Lock was a commission based salesman in British Gas. Sixty percent of his income was generated through sales he made. Whilst on annual leave he received commissions on sales he had earned. However, he was unable to bring in sales whilst on holiday and thus his income was affected on his return to work by virtue of the holiday leave he had taken. He claimed he should be paid according to sales he would have earned had he been working, even though he had not earned them and the company had not therefore benefitted from them. He claimed the failure to pay him in that way amounted to an unlawful deduction from his wages. The Employment Tribunal referred the matter to the European Court of Justice for guidance. The European Court agreed with Mr Lock’s analysis but left the method of calculation to the English Courts.
In the intervening period several cases on the issue of holiday pay came before the Employment Appeal Tribunal in the form of the Fulton v Bear Scotland case and others. Whilst these did not deal with the issue as to whether commission should be included within holiday pay calculation, they considered similar principles involving whether non-guaranteed overtime should be included. Non-guaranteed overtime is where an employer is not obliged to offer overtime to the employee but if offered it, the employee is obliged to accept it. The EAT considered the guidance from Europe and concluded that it should be included in the calculation of holiday pay in respect of the 4 weeks European leave element. This effectively meant 2 separate holiday pay calculations depending on whether you were looking at the first 4 weeks of annual leave taken in the year (EU leave) or any additional leave entitlement (English leave).
The Bear Scotland decision also narrowed the situations in which claims for unlawful deduction from wages could be brought. Only claims where there had been less than 3 months between deductions being made could be brought, a delay longer than 3 months would result in a claim in respect of previous deductions being found to be out of time. In the meantime, the Government, concerned about the potential impact of the cases and the potential for claims being brought against employers for up to 16 year’s worth of holiday pay, brought in legislation to limit any claims to a maximum of 2 years.
Back to the Lock case, the Employment Tribunal followed the ECJ’s guidance, and the Bear Scotland decision, and found in Mr Lock’s favour. Commission should be taken into account when calculating the 4 weeks holiday pay. British Gas, understandably unhappy with this decision, appealed to the Employment Appeal Tribunal, arguing that reading the Regulations in line with the Directive was impossible and that the plain wording of the Regulations would be undermined if there was any attempt to do so. Had the argument been successful, the holiday pay saga would have flipped in favour of employers. However, the argument has been unsuccessful.
The EAT has today ruled that it is necessary to read the Regulations in line with the Directive and that although the two appear at odds with each other, the European legislation must be adhered to.
Although perhaps expected, today’s decision confirms that not only are employee’s entitled to take holiday leave, they shouldn’t be deterred from taking time off ie by not receiving what they would otherwise have earned had they not taken the leave. We therefore have EAT cases confirming that commission and non–guaranteed overtime payments should be included when calculating the first 4 weeks of holiday pay entitlement. The general theme suggests that as and when challenged further it is likely that voluntary overtime payments should also be included in the calculation. The Northern Irish case of Patterson v Castlereagh Borough Council, although not binding, already suggests that there is no reason why such overtime should not be included. Employers who until now have held off including such commission based payments in their holiday pay calculations will now be obliged to include them. Wage bills will rise as a result.
Employers who use voluntary overtime may still wish to hold off including these payments when calculating the 4 weeks holiday entitlement, until they are formerly decided upon, although the trend appears to be in favour of ensuring employees are not financially penalised and thus deterred from taking leave entitlement. There can be practical and/or tactical reasons for making such payments now, even if no formal decision has been taken in respect of certain allowances and/or payments. Take legal advice if in doubt.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.