Holiday Pay Must Include Results Based Commission


Since the Working Time Directive has been introduced into UK law the employment tribunal has been inundated with claims regarding what constitutes normal pay for the purposes of calculating Holiday Pay for employees.

Devonshires has followed these claims and reported on the effect of the outcome on employers to assist with calculating holiday pay. One decision that was to be particularly crucial was the case of Lock v British Gas which began in the Employment Tribunal, has been heard by the ECJ and has found itself in the Court of Appeal.

In this case Mr Lock worked for British Gas as a sales consultant. In this role he was paid, in addition to his basic salary, monthly commission which was dependent on his sales. It was argued by the claimant that the commission should be included as part of his income for the purposes of calculating holiday pay.

After being heard by the ET, EAT and ECJ the question for the Court of Appeal was whether it was correct to apply a wide interpretation to the Working Time Regulations and in doing so allowing commission to fall within the definition of “normal pay”

The decision

The Court of Appeal ruled that results-based commission constitutes normal pay under the Working Time Regulations and therefore when an employer is calculating holiday pay they will need to take an average of the employees income prior to the holiday. Although this decision confirms the approach of the EAT the Court of Appeal restricted their decision to results-based commission only in comparison to the approach of the EAT which ruled all commission constitutes normal pay. Whether or not other types of commission would constitute normal pay is still therefore up for debate.

Further although the court of appeal said that employers would need to calculate the employee’s average pay for a period preceding the annual holiday they failed to comment on the appropriate period of time that should be taken into account. In Lock v British Gas the EAT had said that average pay should be calculated based on the previous 12 weeks immediately before the holiday. Although the Court of Appeal approved this, it is not clear whether it is a one size fits all approach, we would assume not. As such each employee will need to be assessed on an individual basis and a decision taken as to the appropriate period, although 12 weeks would be a good starting point.

What next for Holiday Pay and Employers?

  • With Brexit looming it is unclear as to whether the government will unravel the Working Time Regulations although the Court of Appeal decision will remain binding until it is overturned.
  • We would expect that more cases will come before the Court of Appeal asking them to consider other types of pay and particularly other types of commission that might not be results based.
  • The question over how to calculate holiday pay is still left unanswered so claims will continue to be ongoing in this respect and we will wait to see what approach the tribunals take.

And of course British Gas can appeal to the Supreme Court. So this decision has far from settled the dust but it has given an indication as to the approach the courts might take towards employees who earn income in ways other than a fixed annual salary.

For further information on any of the above and the impact on you please contact the Devonshires Employment Team.

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