HM Insights

Holiday pay and commission: latest decision in Lock v British Gas backs employees

The latest judgment in the series of cases on holiday pay has now been released, and the Employment Appeal Tribunal (EAT) has upheld the employment tribunal’s decision in the case of Lock v British Gas.

Out Of Office Holiday Pay Commission Employer Law Employment Lock British Gas

This is the well publicised case regarding holiday pay and commission, in which the employment tribunal ruled after the case had been referred back to it from the European Court of Justice (read our previous blog on it here).

The decision means that employees with regular working hours whose remuneration includes commission or similar payments will fall to have a week's pay, for annual leave purposes, calculated at the average rate over the previous 12 weeks, and this will include commission, not only basic salary.

It is important to note that this decision applies only to the four-week European Directive related annual leave and not the full 5.6 weeks granted by the WTR.

Employers who regularly pay commission or bonuses intrinsically linked to job related functions and who don’t factor that in to certain holiday pay calculations need to be conscious that continuing such a practice is against the decisions being made by the tribunal and EAT in this area. However, it is a complicated area and if there is a further appeal, the legal position may be regarded as still uncertain.

Background

This was an appeal against the decision of the tribunal, in which it found that the UK's Working Time Regulations 1998 (WTR) can be read to make it clear that certain 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.

The case concerned an employee who was paid during leave, but comprising only basic salary during that time. The employee typically earned more in results-based commission than they did in basic salary, but had to be at work to write deals and thus earn commission. It was held by the employment tribunal, following the ECJ decision, that the WTR must be interpreted so that annual leave pay reflected both basic salary and such regular commission payments in the calculation of pay for holidays.

The Appeal

The appeal was based on a number of legal principles, regarding whether it was possible for the WTR to be interpreted by the employment tribunal in the way that it had been.

A number of previous cases were considered, including Bear Scotland & others v Fulton & others, an unrelated case, but one which considered similar issues, regarding the inclusion of overtime when calculating holiday pay (our blog on it is here).

Whilst these legal points (and the reasoning of the EAT) are of considerable interest to employment lawyers and HR practitioners, the key matter for employers is that the appeal was unsuccessful and this appears cement the position in law, in favour of employees.

It’s not over …

This EAT decision states that there are some 918 claims outstanding against British Gas which have been put on hold pending the outcome of this case. Given the potential cost to British Gas of such claims, it came as no surprise when it intimated that it has requested permission to appeal to the Court of Appeal so that there can be a definitive ruling on this issue.

Possibly the outcome was unsurprising given the decision in Bear Scotland. Although the EAT does not need to follow previous decisions of the EAT, it tends to do so. It usually takes a decision on appeal from the EAT to change prior directions and principles decided by the EAT, rather than another decision of the EAT. If and when the appeal goes ahead, we’re unlikely to see another decision on this case until 2017.

However, we now have further appellate authority on this matter and employers who regularly pay commission or bonuses intrinsically linked to job related functions and who don’t factor that in to certain holiday pay calculations need to be conscious that continuing such a practice is against the decisions being made by the tribunal and EAT in this area. However, it is a complicated area and if the litigation continues, the legal position may be regarded as still uncertain. Mostly all cases lodged in the Employment Tribunal in Scotland are sisted and not being heard at present, whilst the appeals in England continue.

What should you do, and how we can help

If you’ve not already conducted an audit of your holiday pay arrangements we can help you examine if you have areas of risk or if you need to consider rearranging payment strategies, to mitigate the risks in this area. Reframing remuneration and reward structures within your business may help to minimise exposure. Implementing change, if necessary, also needs to be carefully handled or exposure can arise, with potential claims stretching back years if there has been an ongoing state of affairs in which holiday pay has not been correctly calculated and paid.

We’ve also recently produced a short podcast on holiday pay, which deals with this topic in more detail, also available here.

Get in touch

To discuss further, please contact a member of our employment team