Holiday pay must include performance-based commission: The Court of Appeal’s decision in British Gas Trading Ltd v. Lock and another
The Court of Appeal has delivered its judgment in one of the key holiday pay cases, British Gas Trading Ltd v. Lock and another. It held that pay for the four weeks’ of annual leave derived from the European Working Time Directive must include an element for commission.
As a salesman, a portion of Mr Lock’s earnings were received through commission payments. When he was on holiday, however, he would be unable to earn any commission and his holiday pay was made up of salary only. Mr Lock argued that this decrease in pay would disincentivise employees who earn commission from taking their holiday entitlement. The Employment Tribunal that heard Mr Lock’s case referred the question to the Court of Justice of the European Union (CJEU), which ruled that, as his commission is directly linked to his employment, it should be taken into account in calculating his pay during the four weeks’ of holiday derived from the European Working Time Directive. The case was then remitted back to the Employment Tribunal to apply the CJEU’s ruling into UK law. The original decision of the Employment Tribunal was upheld by the Employment Appeal Tribunal, confirming that Mr Lock’s holiday pay had to include an element for commission; however, British Gas appealed this decision to the Court of Appeal.
Court of Appeal
The Court of Appeal dismissed British Gas’ appeal. It held that as the UK Government intended to implement the European Working Time Directive in its entirety, the UK Working Time Regulations could and should be interpreted as entitling employees to holiday pay amounting to ‘normal remuneration’. Performance-based commission schemes which rewarded employees based on output were intrinsically linked to their role and should be regarded as part of normal remuneration.
Whilst this case is a very important update to the calculation of holiday payments in the UK, it does not tell us anything new. It provides clarification that commission payments, and other regular payments which are intrinsic to an employee’s job, must be paid as part of holiday pay (in addition to basic salary) during the four weeks of holiday derived from the European Working Time Directive.
Still some uncertainty?
The Court of Appeal did not clarify how long the reference period should be in order to assess an employee’s average commission payments. Some have suggested taking the average over a 12-week period but, without further guidance from the courts, each employer may need to decide on an appropriate reference period based on the industry they work in and their commission scheme.
It was noted by the Court that their judgment was confined to the particular circumstances of Mr Lock’s case and that other situations may raise further questions as to what ‘normal remuneration’ is. One example given was a banker and whether the calculation should take into account his annual bonus. Whether or not the annual bonus would amount to ‘normal remuneration’ would depend on the structure of the bonus scheme. An entirely discretionary bonus is unlikely to amount to normal pay, but a performance based bonus could.
It is likely that British Gas will appeal this decision to the Supreme Court. As such, employers may not wish to update policies or contracts until the Supreme Court has made its ruling. Also, as the holiday pay saga stems from European Union law, it is possible that this area of employment law at least may be subject to change in post-Brexit Britain. This is another reason why employers may wish to delay making any permanent changes to contracts and policies which could inadvertently give employees contractual rights over and above the basic statutory position.
This article was written by Shepherd & Wedderburn for Lexology and is reproduced with kind permission.