28/03/2015 - Holiday pay must include commission

employmentappealtribunalThe Working Time Directive provides that every worker has the right to paid annual leave of at least four weeks.


Lock v British Gas [2014] ICR 813 was considered by the Court of Justice of the European Union who had to decide whether holiday pay calculations should include average commission.


Since 2010, Mr Lock has been employed by British Gas as an Internal Energy Sales Consultant.His task is to persuade business clients to buy his employer’s energy products.His remuneration consists of two main components: a basic salary (of £1222.50 per month at the time of the facts) and commission. The commission, also payable on a monthly basis, is calculated on the basis of the sales made by Mr Lock. It is paid not at the time that the sales are made, but several weeks or months following the conclusion of the contract between British Gas and the client.


Mr Lock was on paid annual leave from 19 December 2011 to 3 January 2012. For December 2011, his remuneration was composed of basic pay of £1222.50 and commission earned over
previous weeks of £2350.31.


In 2011, Mr Lock earned an average monthly commission of £1912.67.


Having not worked during his annual leave, Mr Lock did not make any new sales and therefore did not generate any commission. Since this had an adverse effect on his salary during the months
following his annual leave, Mr Lock decided to bring an action before the Employment Tribunal in order to claim the remainder of his holiday pay to which, in his view, he was entitled for the period from 19 December 2011 to 3 January 2012.


The Employment Tribunal asked the European Court of Justice whether, in such circumstances, the commission which a worker would have earned during his annual leave must be taken into account in the calculation of his holiday pay and, if so, how the sum payable to the worker must be calculated.


The Court pointed out in its judgment that, during annual leave, a worker must receive his normal remuneration.


The purpose of holiday pay is to put the worker, during that period of rest, in a situation which is, as regards his salary, comparable to periods of work.


According to British Gas, that objective was achieved since Mr Lock received, during his annual leave, a salary including not only his basic salary, but also the commission resulting from sales achieved during previous weeks.


The European Court rejected that argument.


It took the view that, notwithstanding the remuneration received by Mr Lock during his annual leave, the financial disadvantage which, although deferred, is nonetheless genuinely suffered by him during the period following that leave, may deter him from exercising his right to annual leave

As British Gas conceded, the worker does not generate any commission during the period of his annual leave. 


Consequently, in the period following his annual leave the worker is only paid his basic salary. That adverse financial impact may deter the worker from actually taking leave, which is all the more likely in a situation such as Mr Lock’s, in which commission represents on average over 60% of his monthly pay.


The European Court therefore found that such a reduction in holiday pay is liable to deter the worker from actually exercising his right to take his annual leave, which is contrary to the objective pursued by the Working Time Directive


In Bear Scotland v Fulton [2015] ICR221, the Employment Appeal Tribunal recognised that the Working Time Regulations 1998 (“the Regulations”) in certain respects do not conform to the EU Working Time Directive (2003/88/EC). It found that the Directive required regular overtime to be considered in the calculation of holiday pay. The Regulations had to be applied consistently with the Directive and they were therefore subjected to some judicial re-drafting to achieve that.


Could the same redrafting be done in the Lock case? That was sent back to the Leicester Employment Tribunal to decide.


In a Reserved Judgment handed down on 25 March 2015, the Employment Judge decided that the regulations could be amended to ensure that sales commission was included in the calculation of holiday pay.


Amending Regulation 16(3), which modifies the effect of sections 221 to 224 of the Employment Rights Act 1996 when calculating a week’s pay for these purposes, the Employment Judge decided to add a new Regulation 16(3)(e) stating:


‘ if, in the case of the entitlement under regulation 13, 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 for the purpose of s.221.’


This gives effect to the Judgment of the CJEU and reinforces the obligation on employers to include commission in their holiday pay calculations.


There are a few outstanding questions:


Where a commission scheme is deliberately structured to compensate employees for annual leave is there still a requirement to include commission in the holiday pay calculations under the Regulations?


If regard must be had to commission normally received when calculating holiday pay, what is the correct reference period for calculating the average commission to be included in a week’s pay?


The Tribunal stated that those points will be considered at a later date.

Pat Harrington, general secretary of Solidarity, commented:

“Where our members are not getting holiday pay which follows the rulings on overtime and commission they need to get in touch with us. We will take action to ensure that they get this and any back money they are due. If you are a member of another Union you need to press them on this issue. If you are not a member of any Union you should join one – it doesn’t even have to be ours though of course you would be welcome!”