Holiday pay and commission: What did the Employment Tribunal say yesterday in Lock?

Further to yesterday’s Tweets from UNISON that the Employment Tribunal (“ET”) had issued its decision in the case of Lock v British Gas Trading Limited (see our alert here), we now have a copy of that decision (see here). The key message from this decision is that to accord with European law holiday pay should reflect a worker’s normal remuneration.

The more interesting issues for employers battling with commission and holiday pay are still to be determined in this case, such as whether the British Gas commission scheme already compensated for commission lost during holiday periods and if not, the applicable reference period for calculating commission to be taken into account.  Employers should keep a careful watch on further developments in this case and other case law in this area since whilst any decisions will inevitably be fact specific, they will be helpful for employers reviewing the nature of the payments they make and the design of their schemes in seeking to manage costs going forward.

What is the issue?

Mr Lock’s claim was for unlawful deduction of wages based on holiday pay being calculated only on his basic salary in accordance with the UK Working Time Regulations (“WTR”) and not including a payment for commission he had earned for “live” sales. This commission was a significant part of his remuneration package. For workers who have normal working hours, as Mr Lock did, the black and white wording of the WTR only permit payments other than basic salary to be taken into account in holiday pay in specific and limited circumstances. These circumstances include commission paid for the “amount” of work done (i.e. a payment reflecting productivity) but not for success (i.e. a payment such as Mr Lock received for closing a sale).

The European Court of Justice (“ECJ”) had previously held that this was contrary to the Working Time Directive (“WTD”) which required Mr Lock should be paid his normal remuneration i.e. his basic salary and a payment reflecting his sales commission. If not, Mr Lock would suffer an adverse financial impact potentially deterring him from actually taking holiday (see here). The question for the ET was therefore whether our UK rules on calculating holiday pay, provided for in the WTR, could be interpreted to give effect to the ECJ decision.

So what did the Employment Tribunal say?

• Our WTR can be read to be consistent with the requirements of the WTD that a worker should receive his or her normal remuneration during the four weeks statutory holiday provided for in the WTR derived from Europe. This accords with the recent Employment Appeal Tribunal decision on overtime pay (see here) and indeed, the ET stated that it saw “no difference in principle between payment for non-guaranteed overtime and payment in respect of commission so far as annual leave pay is concerned”.
• To achieve this in Mr Lock’s case, a new regulation should be read into the WTR which essentially required Mr Lock’s holiday pay to be calculated as if he fell within the category of workers whose weekly pay varied by the amount of work done. This calculation already takes into account any additional payment made to a worker reflecting the amount of work done in a specific time frame (along with basic salary).
• Further hearings would be held to determine any holiday pay that Mr Lock had not received taking into consideration the facts of his case, including the terms of the commission scheme operated by British Gas.

What are the key points for employers?

• As indicated yesterday, this ET decision is itself unsurprising and is in line with other cases that holiday pay must reflect normal remuneration and is limited to the four weeks statutory holiday derived from European law (and not the additional 1.6 weeks provided by UK law).
• Of more interest for those grappling with revising their holiday pay calculations will be the issues still to be determined in this case and the light an ET may shed more generally on this area:
  • The ECJ has already indicated that commission such as Mr Lock’s (here it was roughly 60% of his remuneration package) should be reflected in holiday pay as being part of his normal remuneration. Would that conclusion be different if the commission element was significantly less or payments were perhaps less regular?
  • Was the British Gas commissions scheme already structured to compensate him for holiday periods so there was no unlawful deduction in respect of holiday pay? This was an issue expressly left open by the ET in Mr Lock’s case to be considered at a future date.
  • Should the subsequent hearing find that there was an unlawful deduction in respect of holiday pay, the thorny question arises of how is the commission element of holiday pay calculated. This is potentially controversial given the fluctuating nature of commission payments and the scope for employees to thereby manipulate the system to take holiday when the commission element of their holiday pay will be at its highest. Again, the ET here appears to have, on the face of it, neatly avoided this issue by again stating that this is a matter for a later hearing. However, the words inserted by this ET into the WTR to enable it to be interpreted to bring cases such as Mr Lock’s in line with European law, expressly refer to sales commissions being treated as remuneration varying with the amount of work done for the purposes of calculating holiday under s221 of the Employment Rights Act 1996. This section provides for a 12 week reference period in such cases so it will be interesting to see how a subsequent ET tackles this issue.
  • If there is found to be an unlawful deduction of wages will the ET follow the EAT decision in the overtime cases that any claims for unlawful deduction of wages should be limited to those deductions where there is no more than a three month gap between them?
• It is also notable that the additional wording inserted by the ET into the WTR to bring workers such as Mr Lock within the provisions for workers whose remuneration varies by the amount of work done expressly refers to “commission or similar payment[s]”. However, the ET decision itself states that “this case does not concern whether any other form of remuneration (such as discretionary bonuses, for example) ought to be taken into account in determining holiday pay”. This leaves open the question of what is a “similar payment” to commission.
• Employers should also keep in mind when considering holiday pay issues that from 1 July new statutory regulations purport to limit any unlawful deduction of wages claim to a period spanning no more than two years (see here).

On the face of it, in the immediate term, yesterday’s decision unfortunately does not provide employers with the additional clarity needed on how commission (and indeed, other similar payments) should be reflected in holiday pay. What is notable is the explicit reference to a scheme being structured in a way that the commission element of holiday pay is already taken into account and it will be interesting to see how a subsequent hearing deals with this and, as relevant, any applicable reference period for calculating holiday pay. If you wish to discuss this decision and its implications for your commission schemes in anyway please contact your usual OC Contact.