A landmark case relating to how holiday pay should be calculated for employees who earn commission has found that commission payments which are intrinsically linked to the performance of a worker’s’ contractual duties must be included in holiday pay calculations. 

The high profile Lock v British Gas case was heard at an Employment Tribunal on 4th February 2015 after the European Court of Justice (ECJ) last year. In the case of Mr Lock, the ECJ ruled he was disadvantaged by the fact he couldn’t earn commission whilst on holiday and therefore this had an impact on his earnings in the following month. The Employment Tribunal has now determined that the UK’s Working Time Regulations can be interpreted in line with the European ruling.

Now that it has cleared that ‘hurdle’, lawyers at national law firm Irwin Mitchell say it is likely to change the way that companies could pay some commission in the future and believe it could potentially open the floodgates for back pay from employees who have similar commission arrangements and believe they have been disadvantaged. Glenn Hayes, an Employment Partner at Irwin Mitchell, said: “The Tribunal decided that the Working Time Regulations can be reworded to enable UK legislation to comply with the requirements of the European Directive and it has suggested new wording to be added to the Regulations to enable it to do this.  In essence, this means that workers whose remuneration includes commission or similar payments, should have their holiday pay calculated in the same way as workers whose pay varies according to how much work they actually do.  Commission will have to be included in the calculation.

“The reason for this is so that workers, in this case Mr Lock, are not put off taking holiday because of  the financial disadvantage they would suffer.  In Mr Lock’s case commission amounted to 60 percent of his earnings, and he could not earn commission whilst on holiday – a clear deterrent from taking time off. As Mr Lock’s case has cleared this hurdle, the Tribunal will have to determine, at another hearing, what compensation should be awarded by British Gas to ensure that workers like Mr Lock are not disadvantaged by taking a holiday. This is likely to be done by averaging his pay over a given reference period.  The case however does not determine what that reference period should be, whether for example it should be averaged over a 12 week or a 12 month reference period.  That is to be decided at a later date.

“However, it is important to bear in mind here that Mr Lock’s commission scheme was straightforward.  It is clear that Mr Lock suffered a loss when he took a holiday, albeit one that affected his later pay cheques, rather than the amount he received whilst on his holiday.  Ascertaining loss will not be as straightforward in other cases where, for example, commission is paid annually, or where the scheme involves discretionary assessments based on a worker’s broader contribution or where this is in part based on individual performance as well as team performance.  We are likely to need workers to bring further cases before we have answers to the more difficult cases.”   

The latest hearing coincides with research published by Irwin Mitchell and YouGov which reveals that almost 40 percent of senior business managers across the UK believe that their company’s payroll costs will increase as a result of recent and forthcoming legal cases concerning how holiday pay is calculated. Out of those businesses, 27 percent said that they expected the financial impact on their staff overheads will be between six and 10 percent. One third (31 percent) were unsure. Significantly, 79 percent of employees said that they were aware of recent judgments which said that some overtime and commission should be included in holiday pay, with one fifth saying they were considering making a claim.

Half of those senior managers surveyed, which included chief executives and company directors, said that they do not have a plan for dealing with the issue. The issue of overtime and holiday pay was also under scrutiny last year via the Bear Scotland v Fulton case. Here the Employment Appeal Tribunal found non-guaranteed overtime should be included in holiday pay calculations. It also however decided that the opportunity for claims for underpayment would be limited if there was a break of more than three months between one underpayment and another.