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Holiday pay must include commission, confirms Court of Appeal

3rd Nov 2016
Employee Benefits, Employment Law, Payroll

Payment for Annual Leave must include commission after the Court of Appeal has held that the Employment Appeal Tribunal (EAT) was correct in their decision to uphold a previous decision of an employment tribunal. The Tribunal had decided that the Working Time Regulations 1998 (SI 1998/1833) can be interpreted to require employers to include a worker’s commission in the calculation of his or her holiday pay.

Details

Mr Lock, a sales consultant with British Gas, claimed in the employment tribunal that he was owed money on the basis that his holiday pay did not reflect what he would have earned from results-based commission. On top of his basic pay, he is paid monthly commission, which fluctuates based on his sales.

The tribunal asked the European Court of Justice (ECJ) for clarification on whether or not it was a breach of the Working Time Directive (2003/88/EC) for the Working Time Regulations 1998 to limit the calculation of a week’s pay for annual leave to basic pay and to exclude commission.

The ECJ held that a worker’s commission payments must be included in the calculation of his or her holiday pay.

The ECJ said that a failure to pay “normal remuneration” – including commission – in respect of annual leave is contrary to the objective of art.7 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 employment tribunal found for Mr Lock.

Employment Appeal Tribunal (EAT)

British Gas appealed to the EAT. The EAT agreed with the first-instance tribunal that the EAT decision in Bear Scotland is binding on the tribunal. The EAT held that there is no valid basis for different results in Lock (on commission) and Bear Scotland (on overtime).

The Court of Appeal

The Court of Appeal agreed with the EAT. It accepted that UK courts and tribunals are no longer bound by domestic case law that decided that all that has to be included in a worker’s holiday pay is his or her basic pay (Bamsey and others v Albon Engineering & Manufacturing plc [2004] IRLR 457 CA and Evans v Malley Organisation Ltd t/a First Business Support [2003] IRLR 156 CA). The Court of Appeal noted that these cases came before the ECJ decided that concealed within the language of the Working Time Directive is a requirement that member states ensure that holiday pay is calculated by reference to a worker’s “normal remuneration”.

The Court of Appeal limited itself to deciding whether or not the interpretation is correct in this case and refused to be drawn into a debate about the impact of this interpretation on other types of payment.

The Court of Appeal stressed that its function was to decide the appeal in Mr Lock’s case. It also declined to provide guidance as to the appropriate reference period for the calculation of holiday pay.

The Court of Appeal did suggest that the wording that the employment tribunal implied into the Working Time Regulations 1998 is too wide (a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done). The Court of Appeal recommended that, when the case goes back to the employment tribunal, the implied wording be more clearly confined to the circumstances of Mr Lock’s case. It said that the implied amendment should refer only to “results-based commission”.

Implications for employers

This decision does not say anything about holiday pay that employers will not already know from the EAT decisions in Lock and Bear Scotland.

While it should be clear to employers that they must now include commission in holiday pay, the biggest unanswered question remains the appropriate reference period for averaging the commission.

Some commentators have suggested that 12 weeks is a sensible reference period, until any further decision is made employers should make their own decision based on the details of their commission scheme and the industry in which they operate.

Although it is likely British Gas will appeal the latest ruling, and we cannot of course predict what the official outcome of that will be, it is now widely accepted that including such additional payments is the fair and correct thing to do in anticipation of the law changing.

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