Court of Appeal holds that contractual results-based commission must be included in holiday pay

Court of Appeal holds that contractual results-based commission must be included in holiday pay

The Court of Appeal recently gave its judgment in the case of British Gas v Lock. This is one of the key pieces of litigation focusing on how holiday pay should be calculated.

Historically, statutory provisions in the UK have always been interpreted narrowly to limit holiday pay, for those working normal hours on a fixed salary, to a simple calculation of basic pay. Variable pay such as overtime and commission were not included.

Following a number of cases over recent years challenging this, we are now in a position where the statutory provisions have been reinterpreted to give effect to EU law, meaning that holiday pay must cover all ‘normal remuneration’, and not simply basic pay, so the employee is not worse off when on holiday than he would be at work.

Mr Lock brought a claim against British Gas for unlawful underpayment of holiday pay claiming commission payments should have been taken into account. 60% of his total remuneration was made up of commission.  Although he received commission payments during his holiday, referable to the period before his holiday, following a period of time on holiday, where he was not earning commission, he suffered a large reduction in pay.

Following a reference to the Court of Justice of the European Union, the Tribunal and the Employment Appeal Tribunal (EAT) both found for Mr Lock. In order to receive normal remuneration during holiday, his commission must be included. The Tribunal decision, upheld by the EAT, inserted words into the UK legislation to ensure that ‘commission or similar payments’ are included in holiday pay.

British Gas appealed to the Court of Appeal (CA).

The CA upheld the previous decisions that Mr Lock’s commission should have been included in holiday pay calculations.  However, the CA emphasised that they were only considering the facts of this case, which involved a results based commission scheme. Therefore, instead of ‘commission or similar payments’ being included in holiday pay, it is clear that this case only covers contractual results-based commission.

It was hoped that the judges in the CA would take the opportunity to provide some guidance on the many outstanding practical points. This opportunity was missed as the CA steadfastly refused to deal with any of these issues. Therefore, we still have no clarity on the following:

  1. How to actually calculate holiday pay for Mr Lock who was paid commission during his holiday and it was after his holiday that he suffered a loss.
  2. What the correct reference period is for calculating holiday, particularly for workers with remuneration that varies during the year.  In most cases average pay is calculated using a 12 week reference period before the holiday.  However, this may not always be appropriate (for example when a person has received a large one off commission payment shortly before their holiday).  The CA made no finding in relation to this. 
  3. Whether other elements of pay should be included in ‘normal remuneration’, for example annual bonuses or other types of commission.

It should also be noted that this decision only applies to the four weeks of holiday provided for under EU Law. It does not cover the additional 1.6 weeks’ holiday that workers are entitled to by virtue of UK legislation, or to any additional contractual holiday provided by an employer. This situation is fraught with difficulties as it is often not clear which holiday days are the EU enhanced ones and which are the UK/contractual ones.

The current law means that employers should be including contractual results-based commission in holiday pay. Some employers, however, may wish to wait before making permanent contractual changes to holiday pay in light of the following:

  1. It is understood that British Gas intends to appeal this decision to the Supreme Court.
  2. There is bound to be some clarification from the Tribunals on the practical uncertainties at some point.
  3. We do not know what impact Brexit will have on the holiday pay issue and there may be legislative changes in due course. 

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