In the long running saga concerning which elements of pay should be paid to workers while on annual leave, the Employment Tribunal in Lock v British Gas Trading Limited has confirmed that the Working Time Regulations 1998 (the Regulations) should be interpreted as requiring holiday pay to include commission payments.

In this case, Mr Lock was paid a basic salary plus commission on sales. The commission element amounted to approximately 60% of his remuneration. While on annual leave, he received his basic pay plus any commission earned from previous sales. However, being on annual leave meant that he could not continue to generate sales and therefore commission and as such, he suffered reduced earnings in the period after he returned from leave. He argued that, during his annual leave, he should have been paid not only his basic salary and commission already earned, but also a sum representing the amount of commission he could have earned had he attended work.

The case was originally referred to the Court of Justice of the European Union, which held that the Working Time Directive 2003 (the European Directive) prevents a national law allowing employers to limit holiday pay to basic salary only and that commission must be included. The case was then passed back down to the Employment Tribunal to determine whether the Regulations are compatible with the European Directive. The Employment Tribunal acknowledged that the wording of the Regulations does not reflect the position under the European Directive. However, in order to make them compatible, it has inserted wording into the Regulations specifying that commission (and similar) payments have to be included in holiday pay calculations.

This case comes shortly after the case of Bear Scotland Ltd v Fulton, which decided that holiday pay has to reflect “normal remuneration”, not just basic salary. In the Fulton case, it was held that non-guaranteed overtime payments must also be included.

The courts have been consistent in their message; there is an important health and safety justification for requiring employers to pay “full” rather than “basic” pay for holiday, as workers should not be deterred from taking leave.

The holiday pay saga is not yet over, however, as there are a number of unanswered questions including the following:

  • It is still unclear what exactly should be included in holiday pay. The Tribunal’s decision referred to commission “and similar payments” needing to be paid during annual leave. However, the Tribunal highlighted that its decision in this case did not concern other types of payment, such as discretionary bonuses. It is now clear from recent case law that commission, guaranteed and non-guaranteed overtime, travel time expenses (not to cover costs) and some allowances should be included in holiday pay. There has been no decision on how to treat purely voluntary overtime or bonuses. However it does seem likely that a Tribunal will find in the future that certain bonus payments and that most voluntary overtime payments will also need to be included in holiday pay if they are paid regularly over a sufficient period of time and therefore are classed as ‘normal remuneration’. 
  • We are still waiting for a Tribunal or Court to clarify the applicable reference period over which such payments should be calculated for holiday pay. For example, average commission calculated on the basis of commission payments made in the previous 12 weeks (the reference period set out in the Regulations) could be vastly different to average commission calculated over the last 12 months. 
  • How to calculate holiday pay when, as in this case, the employee was receiving normal pay during his holiday (being paid the commission from sales pre-holiday), but after his holiday he was earning less having lost the opportunity to earn commission during his holiday.

The practical quantification of how much to actually pay is in most cases complicated and still uncertain.

Employees may currently bring unlawful deduction from wages claims in the Tribunal if their employer has failed to pay holiday pay which includes all normal remuneration. They can bring a claim for a series of deductions going back into the past. Case law currently suggests that if there is a break in the series of deductions of 3 months or more, employees cannot claim beyond this break. However it remains to be seen if this will be followed in later decisions. Also, from 1 July 2015, new statutory regulations will limit any unlawful deduction of wages claim to a period of no more than two years before the date of claim.