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Another step in the commission as holiday pay case

A final judgment is expected in March, but what could the possible ramifications be for employers?

The long running saga of whether staff with commission structures should have that reflected in holiday pay came a step closer to resolution recently, when the Employment Appeal Tribunal (EAT) heard the appeal in the case of Lock v British Gas Trading.

The EAT is currently considering the application to the European Court of Justice (ECJ) ruling that commission must be included in holiday pay calculations.

Case law and legislation has previously led employers to believe that workers’ holiday pay should only reflect basic pay. However, a number of judgments in recent years have changed the way it should be calculated, to include such allowances as travelling time payments, regular overtime the worker was required to do (such as in the Bear Scotland case), and potentially also voluntary overtime.

Mr Lock’s claim

Lock was a sales consultant at British Gas and received commission on the sales he made. This varied each month but made up approximately 60% of his total pay. He took two weeks’ paid leave in December 2011, and while he was paid commission for previous sales, he received less pay in the months after his holiday as he could not earn back commission for the time he was away.

Lock brought a claim under the Working Time Regulations 1998, on the basis that his pay during annual leave should include a sum representing commission he would have earned had he been at work. The tribunal referred the case to the ECJ, which held that commission should be included when calculating holiday pay. EU law intends workers to take their annual leave for health and safety reasons, and therefore losing commission or overtime pay would be a disincentive to taking leave.

The tribunal then inserted wording into the Working Time Regulations to make it compatible with European law, and by relying on the Bear Scotland Ltd case that dealt with non-guaranteed overtime.

British Gas’ appeal

However, British Gas then appealed the judgment to the EAT, arguing that the words inserted were both too broad and against the grain of the legislation.

Beyond the legal technicalities of the appeal, the EAT will need to consider whether the Bear Scotland case needs to be followed – should commission and overtime be treated in the same way? Many other issues remain to be resolved; including whether voluntary overtime and bonuses must be taken into account in holiday pay calculations. The correct reference period over which commission payments are counted is also uncertain – should holiday pay include average commission paid over the previous 12 weeks or 12 months? A longer period would even out potential peaks and troughs in the calculation. The EAT may provide some guidance on these.

What does it mean for employers?

If the EAT sides with Lock and dismisses the appeal the tribunal’s decision will stand and commission will have to be included in holiday pay. However, a further employment tribunal will still be required to determine just how much British Gas must pay Lock.

If British Gas’ appeal is successful it will mean the UK’s Working Time Regulations as amended by the tribunal are not compatible with EU law – requiring new legislation to come up with a solution or, if the EAT decides there are conflicting decisions, a further appeal to a higher court.

If new legislation is necessary businesses will have some breathing space, only needing to consider commission payments once it takes effect. Employers are currently liable to claims for backdated holiday pay – although there is a two-year cap on pay arrears claims brought after July 1 2015.

The EAT’s judgment is expected in March 2016. Yet whatever the outcome there are likely to be further appeals to the Court of Appeal or the Supreme Court. Therefore it could be months or even years before businesses have certainty.

Philip McCabe is a solicitor and head of employment at Spencers Solicitors