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8 April 2016

The effect of commission on holiday pay

Article 7 of the Working Time Directive (WTD) gives workers the right to be paid during their annual leave. Unfortunately, it does not then specify how holiday pay should be calculated. In British Gas Trading Ltd v Lock and anor, the Employment Appeal Tribunal (EAT) has confirmed the position taken in Bear Scotland Ltd and ors v Fulton: The Working Time Regulations 1998 can be interpreted in line with the WTD, so as to include results-based commission payments when calculating holiday pay for the basic four weeks' annual leave.

Facts

Mr L was employed by British Gas as an internal energy sales consultant.  He received a basic salary, as well as commission on the sales that he achieved – approximately 60% of his remuneration was results-based commission.

Mr L went on statutory annual leave between 19 December 2011 and 3 January 2012.  During that time, he was paid his basic salary, plus the commission from previous sales that happened to fall due during the period of his leave.  As Mr L was an employee with normal working hours, whose remuneration did not vary with the amount of work done for the purposes of the week’s pay rules, he was someone whose holiday pay only included basic salary and not commission.  As a result, his income dropped in the months following his return to work because he had not been able to secure any sales and had therefore not generated commission whilst he was on holiday.

Mr L brought a claim in an employment tribunal; his was selected as the lead claim for a large number of results-based commission cases across the UK.

He argued that the reduced income amounted to a breach of the Working Time Regulations 1998 (WTR).

The European Court of Justice (ECJ)

The Employment Tribunal acknowledged previous conflicting case law and referred questions to the ECJ, including whether Article 7 of the WTD required commission payments to be included in holiday pay.

The ECJ held that where a worker’s remuneration includes contractual commission, determined with reference to sales achieved (results-based commission), the WTD precludes a national law that calculates statutory holiday pay based on basic salary alone.  It reasoned that if those commission payments were not taken into account, the worker would suffer a financial disadvantage when taking statutory annual leave, as no commission could be generated during the holiday period.  As a result, the employee could be deterred from exercising their right to annual leave – contrary to the WTD’s purpose.

Employment Tribunal (ET)

The Employment Tribunal (ET) had to decide to what degree the WTR 1998 could be read consistently with EU law and if it didn’t, whether words could and should be added in, so that the calculation of a week’s pay conformed with EU law.

Judge Ahmed decided that there was no difference in principle between non-guaranteed overtime and commission and adopted the reasoning from Bear Scotland.  The purpose of holiday pay was to put the worker, during that period of rest, in a situation which was, with regard to his salary, comparable to periods of work.  It was therefore reasonable to include commission, in this case, in the calculation.

British Gas appealed.

Employment Appeal Tribunal

The EAT fully supported the ET’s decision to interpret UK provisions in line with EU precedent.

The ECJ had decided that commission should be included if it was intrinsically linked to the performance of tasks under the worker’s contract.  Whilst the calculation is left up to national courts to determine under national law, it must be based on average commission earned “over a reference period which is considered to be representative”.

Comment

Calculating holiday pay has been a cause of difficulty for employers ever since the Working Time Directive was implemented back in 1998.  This judgment adds a degree of clarity with regard to what should be taken into account but the courts remain reluctant to provide a straightforward formula for calculating holiday pay.

So what should be included in holiday pay under the Working Time Directive?

Following the EAT’s decision in Bear Scotland, statutory holiday pay must be calculated in accordance with the tests set out by ECJ case law:

Holiday pay should be “pay that is normally received” and must include payments “intrinsically linked to the performance of tasks under the worker’s contract”.

If there is a settled pattern of work, the normal remuneration is easier to identify, as it is pay which is normally received.  Payment has to be made for a “sufficient period of time” to justify the label “normal”.  The EAT did not specify what period of time would be regarded as “sufficient”.  If there is no settled pattern of work, then average remuneration should be calculated over an appropriate reference period, determined by national legislation.

However, it is believed that British Gas is considering taking the matter to the Court of Appeal.  If so, the courts might finally provide concrete guidance on calculating holiday pay.