The Employment Tribunal has handed down its decision in the case of Lock v British Gas Trading Limited.
In May 2014 we reported that the European Court of Justice (“ECJ”) had considered the Lock case and had held that holiday pay must include commission. The basis for this decision was that workers should not be financially disadvantaged when taking annual leave as this may deter them from taking the leave, which would be inconsistent with the aims and objectives of the Working Time Directive. The case followed on from the ECJ’s ruling in British Airways v Williams which stated that holiday pay should include all payments which are intrinsically linked to the tasks carried out by the employee.
The ECJ referred Lock back to our domestic Tribunal to decide (i) whether our domestic legislation could be interpreted in line with the ECJ decision and (ii) if so how holiday pay should be calculated to include the commission element. The ECJ stated that the national courts should determine for themselves how the commission element should be calculated but that this should be based on average commission earned “over a reference period which is considered to be representative under national law”.
It comes as no surprise therefore that yesterday’s decision of the Employment Tribunal concludes that commission must be included in the calculation of holiday pay (for at least the 20 days holiday conferred by European law). The Tribunal decided that it was possible to re-draft existing domestic legislation to include the requirement for commission to be taken into account. This has been achieved by a judicial re-drafting of the Working Time Regulations 1998 to add a new Regulation 16(3) (e) stating “as if, in the case of the entitlement under Regulation 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purposes of s.221”. This therefore means that workers whose pay includes commission should have holiday pay calculated based on average pay (including commission) over the previous 12 week reference period.
Yesterday’s Tribunal decision states that the question whether the correct reference period should be 12 weeks (as is currently the case) or a longer reference period (for example the 12 months suggested by the Advocate General in Lock) will be considered at a later date.
The main point for employers to take from the above is that it is now certain that there is a legal requirement that they include commission payments in holiday pay calculations. Failure to do so will allow employees to bring claims for this shortfall in pay and such claims can currently be backdated (potentially indefinitely). This backdating is set to be limited to 2 years under new legislation which takes effect from 1 July 2015 but employees could issue claims before that date to protect their position and give them a stab at a longer period of backdated pay. Unless and until the position on reference period changes it appears that a 12 week reference period should be used for the calculations, however, this is a complex issue and specific legal advice is recommended.
If you have employees or workers who earn commission then this case will have a clear financial and legal impact for your business. This impact will include existing liability for holiday pay in respect of holiday taken in the future but also potential risk of claims for backdated holiday pay where commission has not been included in calculations historically. Employers should also think about the future financial impact and consider the commission schemes that they operate and which probably do not currently take into account the commission earning potential during annual leave. It may be possible to amend schemes so that overall the employer is not paying out any more than previously, for example by adjusting the earning potential to take into account that fact that an average of this will also be paid during the holiday periods. However, employers need to be aware that changes to contractual commission arrangements will involve a change to terms and conditions of employment and appropriate legal advice should be obtained before any action is taken.
This article was written by Nina Robinson, Head of Legal Services.
