UK: British Gas v. Lock – Employers Must Include Commission In Holiday Pay

The Employment Appeal Tribunal (EAT) has held in British Gas v. Lock that holiday pay must include commission payments. The EAT applied the European Court of Justice's (ECJ) ruling on this issue and interpreted domestic UK law in a way that conforms with EU law.

Background

British Gas employed Mr Lock as a salesman. His salary package included a basic salary plus commission, which the employer calculated based on the number and type of contracts he secured from customers. When Mr Lock went on holiday, British Gas would only pay him basic pay, which was significantly less than his usual salary.

Mr Lock issued a claim against British Gas in 2012 and claimed that his holiday pay should include a sum representing the commission he would normally earn while at work.

The European Working Time Directive (EUD) provides that workers must have the right to at least four weeks' paid annual leave. However, it does not specify how to calculate holiday pay. In the UK, the Working Time Regulations 1998 (WTR) implement the EUD and provide that holiday pay, for a worker who works "normal working hours", is calculated on basic salary only.

Despite the clear wording of the WTR:

  • in the Bear Scotland case, the EAT held that the WTR can and should be interpreted to conform with the EUD, and that holiday pay must reflect a worker's "normal remuneration", which includes non-guaranteed overtime; and
  • on referral, the ECJ ruled that holiday pay under the EUD includes commission, to ensure workers are not discouraged from taking annual leave.

In Lock, the employment tribunal (ET) adopted the approach taken by the EAT in Bear Scotland and held that holiday pay includes commission. The ET also held that it was necessary to read the WTR in a way that conforms with EU law, even if this requires the tribunal to imply words into the WTR.

British Gas appealed the ET's decision. It argued:

  • the courts wrongly decided Bear Scotland – adding or implying words into UK legislation to conform with EU law amounted to "judicial vandalism"; and
  • Bear Scotland, a case on non-guaranteed overtime, should not have been applied to a dispute about commission because "commission and non-guaranteed overtime are dealt with under different provisions which use different language".

The EAT decision

The EAT dismissed British Gas's appeal and held that:

  • the WTR can and should be interpreted in line with the requirements of the EUD and the ECJ's ruling; and
  • the ET was right to adopt the Bear Scotland approach as there is no difference in principle between non-guaranteed overtime and commission so far as holiday pay is concerned.

British Gas has sought permission to appeal to the Court of Appeal.

Despite the decision, the EAT's judgment does not clarify how an employer should factor commission or non-guaranteed overtime into the calculation of holiday pay. The Employment Rights Act 1996 uses a reference period of 12 weeks to calculate pay where pay varies according to the amount of work done or the time of work. The Advocate General suggested a reference period of 12 months. The ECJ held that national courts must decide a reference period that they "consider to be representative". The ET has suggested the reference period for calculating holiday pay should be the period of 12 weeks immediately before the holiday (excluding any weeks where an employer paid no salary for any reason).

The ET will now decide how much holiday pay and commission Mr Lock is entitled to in a separate hearing, which should provide helpful guidance on how and when an employer factors commission into holiday pay.

What does this mean for employers?

The EAT's decision is not surprising and now leaves little doubt as to including both commission and non-guaranteed overtime when calculating holiday pay. Since the EAT's decision, employers should consider reviewing their current holiday pay allowances for overtime and commission. Failing to include these payments may lead to a deluge of unlawful deductions from wages claims. Fortunately, employers may benefit from some protection under:

  • the Deduction from Wages (Limitation) Regulations 2014, which have imposed a two-year limit on most claims for backdated unlawful deductions from wages since 1 July 2015; and
  • the "three month rule" in Bear Scotland, under which an employee will lose the right to claim historical arrears of holiday pay if there is a gap of more than three months between underpayments or deductions.

Hundreds of holiday pay claims, issued by employees after the ET's decision in Lock were stayed pending this decision. As British Gas intends to appeal the EAT's decision, defendants of these holiday pay claims should request the stay to remain in place until the Court of Appeal has issued its ruling. Meanwhile, the EAT expects to consider an appeal by employees seeking to challenge the "three month rule" established by the ET in Bear Scotland.

The prospect of the EAT's decision being appealed means that this area of law is still uncertain. However, it is our view the Court of Appeal will likely uphold the current position in light of the three decisions made before it. As such, it has never been more important for employers to audit their holiday pay arrangements, identify areas of risk, and plan how to address these. Employees will no doubt feel more optimistic about issuing holiday pay claims, which could in turn cause significant costs for unprepared employers.

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