HM Insights

Employees holiday pay must now include commission under UK regulations

Employers cannot have missed the headline grabbing employment case law of the past 12 months - the series of decisions on holiday pay. The case that kicked it off last year was Lock v British Gas Trading, which was heard before the European Court of Justice (ECJ) (read our blog about it here.) The latest instalment of the case has just arrived and employers need to know about its effect on holiday pay calculations.

The Employment Tribunal has now decided that the UK's Working Time Regulations 1998 (WTR) can be read to make it clear that commission payments must be taken into account when calculating entitlement to holiday pay, and that there is no need for legislative change to make this happen.

This means that employees whose remuneration includes commission or similar payments will fall to have a week's pay calculated at the average rate over the previous 12 weeks, and this will include commission. It is crucial to note that this decision applies only to the four-week European Directive related annual leave, not the full 5.6 weeks granted by the WTR.

The Lock case

For anyone not familiar with the facts, Mr Lock was a sales consultant with British Gas. He was in receipt of a basic salary of £1,222.50 per month. Above this, he earned commission with reference to the level of sales achieved by him. This averaged out, in 2011, as £1,912.67 per month, meaning roughly 60% of his earnings came from commission payments.

During a period of annual leave, Mr Lock was not able to make sales and so could not earn commission. He was paid only his basic salary in respect of his period of annual leave. In light of this, Mr Lock raised an employment tribunal claim in respect of outstanding holiday pay, arguing that his payment should reflect his commission earnings, not only his basic salary.

The ECJ agreed with Mr Lock and held that commission payments must be taken into account when calculating entitlement to holiday pay. The case was remitted back to the employment tribunal to decide whether the relevant UK law, the Working Time Regulations 1998 (WTR), can be read to give effect to the ECJ's judgment.

This resulted in the tribunal hearing detailed legal submissions on whether the tribunal itself could interpret the WTR in such a way. If it could not, then legislative change would be needed.

Cutting through this academic (but important) debate, the outcome was that the tribunal felt it could interpret the WTR consistent with the ECJ's judgment, through the addition of a new paragraph at Regulation 16(3)(e) of the WTR.

The implications

Whilst there are nuances to the judgment and further discussion to be had about its implications, the message that employers must take now is that employees are entitled to rely on this judgment and the tribunal's interpretation of the WTR.

If any employer has not made provision for this change to calculation of a week's pay, liability is potentially accruing.

To discuss the steps that your business should take, please contact Scott Milligan on 0141 227 9408 or [email protected] or contact one of our employment team.