Author: Michael McCartney
How should employers treat overtime and commission payments when calculating a worker’s holiday pay?
The recent decision of the EAT in the case of British Gas v Lock provides a steer (albeit not a complete answer) to a question which has been circling employers and their legal advisers ever since the Court of Justice of the European Union (CJEU) ruled in Mr Lock’s favour back in 2014.
In summary, the effects of the decision are:
The UK law position up until Lock
The starting point for most employers is Regulation 16 of the Working Time Regulations 1998 (WTR), which says that all workers are entitled to paid leave at a rate of a week’s pay for each week of leave. A week’s pay is calculated according to a statutory formula which is set out at sections 221 to 224 of the Employment Rights Act 1996.
In the case of those workers whose weekly pay is variable, their entitlement is calculated using an average of the pay they receive in the 12-week period immediately before the start of their holiday. Up until the Lock decision most employers (when calculating holiday pay consistent with the WTR) applied an average of the basic pay earned by a worker during this 12-week reference period.
In Mr Lock’s case, however, this led to a dramatic reduction in his pay during holiday periods. His typical take home pay comprised only around 40% of basic pay with the remainder being made up of commission. Since he was unable to generate sales during periods of leave, his take home pay during those periods was markedly lower.
The CJEU decision
The Employment Tribunal referred the issue of Mr Lock’s holiday pay to the CJEU which in turn decided that the exclusion of commission was a clear disincentive to Mr Lock taking his holiday at all. It was thus an infringement of the social purpose underlying the Working Time Directive.
The CJEU ruled that Mr Lock should have his commission included within his holiday pay because this sum was directly linked to the work he performed for British Gas under his employment contract.
Critically, the CJEU then went on to conclude that it was a matter for the individual member states themselves to decide how to give effect to this decision in practice within their own domestic laws. For affected UK employers this meant there was no clear, understandable methodology for them to apply to the calculation of holiday pay for workers receiving sales commission.
The recent EAT outcome
Unfortunately, this is a position which continues despite a determination in Mr Lock’s favour by Leicester Tribunal and even following a recent judgment of the EAT.
The crux of the EAT appeal centred on whether the Tribunal could adopt a liberal interpretation of the WTR so as to give effect to the CJEU decision. British Gas argued that the Tribunal’s approach, which involved adding wording to the existing law, was manifestly wrong and tantamount to “violence” against the existing UK legislation.
The EAT disagreed. It held that the Tribunal was perfectly entitled to interpret domestic law so as to give effect to the Directive, even in circumstances where “to do so fully and accurately” it was necessary for the Tribunal to imply additional words into the WTR.
While there is no clear formula to be applied to the inclusion of commission in holiday pay, there is a helpful confirmation that any such commission will need to be linked to the work performed by the individual.
Thus commission earned by and split amongst a team to reward a collective effort or a success fee conditional upon the fulfilment of a specific project is unlikely in our view to count towards the holiday pay calculation. Similarly annual bonus awards are unlikely to be included.
Note this decision impacts only on the minimum four week holiday entitlement required by the Working Time Directive — not the UK’s statutory requirement (which gives full-time workers an extra eight days or any voluntary holidays offered by employers).
Note also that employees are limited under UK law to claiming up to a maximum of two years’ back pay in respect of any underpayment of holiday.
If you are concerned that your holiday pay/commission scheme is likely to infringe the CJEU’s decision, then our advice would be to await the Court of Appeal decision before making radical changes to your company schemes. In the meantime, you might wish to consider including changes to the employment contracts of new joiners and/or carrying out an impact assessment of the possible liability to consider whether a financial provision is appropriate.
Michael McCartney, Partner, Fladgate LLP (firstname.lastname@example.org)