Holiday Pay and commission payments

29 February 2016

The Background: Lock v British Gas

Mr Lock was employed by British Gas as a salesman, earning a modest basic salary topped up by earnings from a contractual commission scheme. The amount of commission earned by Mr Lock was greatly is excess of his basic salary. While on contractual leave he was paid at the rate of his basic salary only and his commission earnings were not taken into account. Mr Lock claimed for unlawful deduction of wages before the Employment Tribunal saying that the commission payments should have been included in his holiday pay.

The Employment Tribunal (ET) asked the European Court of Justice (ECJ) for clarification. The ECJ said that a failure to pay normal remuneration - including commission - in respect of annual leave is contrary to the objective of the Working Time Directive because it could deter a worker from taking the leave to which he or she is entitled, particularly where commission payments constitute a substantial proportion of total remuneration. On the return of the case to the UK jurisdiction to apply the ECJ judgment, the ET found in favour of Mr Lock.

The appeal

British Gas appealed the ET decision and on 22 February 2016 the Employment Appeal Tribunal (EAT) dismissed this appeal. The Judge decided that the domestic legislation can be interpreted in a way which conforms to the requirements of the Working Time Directive and therefore the decision of the ECJ should be applied. The decision follows a similar decision in Bear Scotland (the decision that non-guaranteed overtime payments should be included in the calculation of holiday pay) and despite the submissions made on behalf of British Gas, the Judge decided that the decision in Bear Scotland was not manifestly wrong.

What happens next?

The above decision agrees with case law in recent years. Employers should assume that commission should be included in holiday pay, as the European Court of Justice said. However, it is unlikely that the story will end here. Given, the large number of parties affected, it would be unsurprising if an appeal was now made to the Court of Appeal.

There are several thousand similar claims against other respondents which have been stayed pending the outcome of this appeal. This has also been selected as the lead claim for some 918 claims against British Gas around the country. These numbers are only expected to increase as employees realise they have been underpaid.

Changes you need to make if your employees earn commission

If your employees earn commission employers need to take appropriate steps to ensure these commission payments are reflected in employees’ holiday pay.

Reference period

At present, the calculations should be made using the previous 12 weeks prior to the start of holiday.

Statutory holidays vs. contractual holidays

The above decision must be applied to the 4 weeks’ statutory leave that comes from the European legislation but not necessarily to the additional 1.6 weeks’ statutory holidays under the UK law. Different calculation can be applied to the additional 1.6 weeks’ holiday, however, this may only cause more practical problems in distinguishing between the two types of leave and applying different procedures and calculations to them.

How big is the risk of getting claims from employees?

Unlawful deduction from wages claims can be brought in respect of unpaid or incorrectly paid holidays. Businesses have been concerned about the prospect of far reaching retrospective claims but a claim has to be brought within 3 months of the deduction and any previous deductions can only be “linked” in a series of deductions if they occurred no more than 3 months previously. This is where the distinction between 4 weeks holiday under the European legislation and the additional 1.6 weeks is important because the EAT has suggested that a series cannot span a gap where holiday pay has been paid correctly – and the 1.6 weeks are still likely to be considered to be paid correctly even if only basic pay is paid.

There could still potentially be cases with claims linking back years, however the introduction of The Deduction from Wages (Limitation) Regulations 2014 means that when making a claim for backdated deductions from wages for holiday pay, a two year cap will be placed on all claims that are brought on or after 1 July 2015. This significantly reduced the potential cost of claims for the employers.

 

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If you need any advice on how to correctly apply the above judgment to the calculation of holiday pay in your organization, please contact a member of our HR Solutions team or email your enquiry to us

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