The CJEU has recently given its judgment on the preliminary questions referred to it in the case of Lock v British Gas Trading Ltd.  The issue was whether the calculation of a week’s pay payable to an employee whilst they are on annual leave (all as provided in the Working Time Regulations 1998 and the Employment Rights Act 1996) should include a payment in respect of commission that the employee would normally have earned if they were at work.

Mr Lock was a British Gas salesman who earned a modest salary and commission from sales.  His commission was payable in arrears after the sales were achieved.  Commission on average equated to more than 50% of his basic salary.  When he took holiday at Christmas, he still received payments for past commissions in his normal Christmas payroll.  However, whilst on annual leave, he could not make any sales commission which would be payable after he returned to work.  He brought a tribunal claim for outstanding holiday pay.  His employer argued (supported by the Government) that as he was paid commission (for past sales) during his holiday, the Working Time Regulations 1998 were complied with. 

The judgment made it clear that the purpose of taking annual leave is to maintain the health and safety of employees and consequently there should be no financial impediment to discourage them from taking their full annual leave entitlement.  Accordingly, holiday pay must be calculated to take into account lost commission suggesting an average reference period of 12 months. However, how this should be calculated was for local legislation to determine.  So now the employment tribunal will have to determine if the Working Time Regulations and Employment Rights Act together can be construed to implement this decision. This all sounds simple: if an employee usually earns commission, they should not be out of pocket by taking their annual leave.  However, how would this work in practice? 

If an employee is paid commission in arrears, then the financial hardship will occur after they have returned from the beach and are awaiting next month’s paycheck which has a reduced amount in respect of commission earned.  So if the employee is paid for the lost commission during the period of absence they would receive payment for commission in arrears and for notional commission earned whilst on holiday creating a bumper paycheck whilst suffering hardship the following month.  Arguably this is not a deterrent from taking holiday, but a deterrent from returning to work!

Before periods of leave employees usually try to close as many deals as possible so there are no lost deals before they go. Would this not then skew the holiday pay calculation? How should the calculation deal with bank holidays and business closures when no commission could have been earned during all or part of a holiday? Would Mr Lock have made many sales on the public holidays over Christmas if he had been at work? The definition of “wages” in the Employment Rights Act uses a 12 week reference period, so each time an employee wished to take one day off, will an employer have to perform a long calculation as to what the average commission the 12 weeks before the holiday was to determine what the rate of pay for one day’s holiday should be? The CJEU decision suggested a 12 month reference period.  This would even out the highs and lows of commission throughout the year, but if this was a rolling period, the calculation would still have to be repeated for every holiday request.

Employers are being asked to pay additional sums to an employee for notional sales which were never actually achieved. So the employer loses both the prospect of a sale if the employee is off work and has to pay the employee as if they did achieve it, a double loss!

This case only applies to the statutory minimum 20 days’ holiday as required by the Working Time Directive and not to any additional contractual holiday or the additional 8 days’ holiday provided to employees under Regulation 13A of the Working Time Regulations.  If an employer only makes payments with regard to commission for the minimum 20 days’ holiday, who will decide whether the period of holiday taken is within those 20 statutory days or the additional statutory or contractual pay so that commission is payable during those absences?  Surely both the employer and employee would want to allocate statutory holiday to the periods of holiday which best suit their own interests.  But not to pay commission for the additional holiday goes against the underlying reasoning of the decision as otherwise, employees may still be deterred from taking their full leave entitlement.

Employees who believe they have been underpaid holiday pay may have a claim for unlawful deduction from wages or they may claim for breach of contract.  An unlawful deduction from wages claim has no time limit for past claims if there is a series of deductions from wages and the last deduction was within three months of the date in which the claim is brought; a breach of contract claim is limited to six years.  Therefore this decision not only gives rise to future, but to possibly very expensive past liabilities. Although happy employees rarely commence proceedings against their employer, claims for underpaid holiday pay is likely to be added to shopping lists of complaints when the employment relationship ends in acrimony or whenever a settlement agreement is proffered.  Highly paid bankers and salespeople who can receive commission in excess of 100 percent of their salary could have very high level claims stretching back to when they first joined their employer.  Group actions funded by or supported unions are also likely (although possibly less so in the public sector where commission is rare) and the costs in multi-applicant claims of the issue and hearing fee in the tribunal fee or county court will be a tiny percentage of any potential award.

If an employer continues not to account for commission in holiday pay going forward, the amount of liability increases every month.  It is possible to break the link in a series of deductions by paying outstanding holiday pay now.  However, as we have already seen, how would an employer correctly calculate this?  And the employee would still have 3 months from the date of the increased overpayment to make a claim for outstanding sums going back six years.  If action is to be taken now, it may be safest to do so by using a settlement agreement and at the same time agree new terms and conditions.  However, such settlement may not come cheap and the new terms and conditions may not correctly calculate holiday pay going forward leaving possible future claims (albeit presumably for considerably smaller figures).

Furthermore, there are two cases due to be decided by the EAT in July concerning holiday and overtime.  So if the same line on holiday is followed, then there will have to be an overhaul of holiday pay calculations generally…because then there is the issue of performance related pay and holiday and sick pay and overtime/commission. This is a ticking time bomb, but at the moment no-one knows how to defuse it as Mr Lock has to go back to the ET for a determination as to how to interpret the WTR and the ERA to accord with the decision.  I suspect most advisers will wait until the ET decision (and possible appeal) in Lock and the holiday and overtime decisions are heard before bringing significant claims.  However, for employees leaving employment shortly, they may be well advised to make tribunal claims now (if they can afford to) which should be stayed pending the decisions in these cases to preserve potentially valuable claims.