EAT’s decision in British Gas v Lock - commission should be included in holiday pay

26th February 2016

Commission payments must be included in holiday pay calculations according to a decision of the Employment Appeal Tribunal (EAT) handed down on 22 February. The EAT followed the decision in Bear Scotland v Fulton (another EAT decision confirming that overtime must be included in holiday pay). Employers who operate commission schemes should review their potential exposure to claims if they do not include commission in the calculation of holiday pay. However, British Gas may appeal against this decision, so watch this space!

Reminder of the facts

Mr Lock was employed by British Gas as a salesman. He received a salary, but the bulk of his pay came from his commission on customer sales. When he took periods of annual leave he would received his salary only. British Gas did not include Mr Lock’s commission payments when calculating his holiday pay. He challenged this in the Employment Tribunal arguing that British Gas were in breach of the Working Time Regulations 1998 (WTR) and European law. For more detail please see our business insight ‘Commission and holiday pay update: Lock v British Gas decision is to be appealed’.

The Employment Appeal Tribunal (EAT) decision

The EAT held that Mr Lock should receive his ‘normal pay’ during holiday periods and that this included his commission. The EAT reached this decision by holding that the wording of the UK legislation could be read in such a way as to comply with European law.

Practical points for employers

• The decision in Lock does not come as a surprise. Since the EAT’s decision in Bear Scotland v Fulton, employers have been required to include overtime payments in holiday pay calculations. The EAT’s decision in Lock confirms that commission payments should also be included. This is because the European courts have held that employees should receive their ‘normal pay’ during periods of holiday so as not to be deterred from taking their entitlement to paid leave.
• Because the EAT’s decision is based on interpretation of European law, the requirement to include commission (and overtime) pay in holiday pay only applies to the 4 weeks’ statutory ‘Euro-leave’ (i.e. 20 days’ holiday for an employee working 5 days per week) and not to the full 5.6 weeks holiday granted by the Working Time Regulations 1998 (i.e. 28 days’ holiday for an employee working 5 days per week) or any additional holiday entitlement. That said, some employers may find it overly burdensome to run two different holiday pay calculations for different periods and will therefore adopt a pragmatic approach of using the same calculation for all holiday.
• It is still unclear what the ‘reference period’ for calculating holiday pay should be for those employees without normal working hours. The Advocate General and the European Court of Justice had, at one stage, indicated that a 12 month reference period may be appropriate but, in the absence of a finding on this point, UK employers may continue to use the existing 12 week reference period set down by domestic legislation.
• Employers who operate commission based pay structures will need to take stock and assess their position. There may be significant potential exposure to claims that will need to be accounted for. A strategy for calculating holiday pay going forward will also need to be determined.
• At the appeal, British Gas had argued that the EAT’s decision in Bear Scotland was wrongly decided. The EAT indicated that it is for the Court of Appeal to determine this point. As British Gas have applied for permission to appeal to the Court of Appeal there remains the possibility that the Bear Scotland decision may yet be overturned. For this reason, employers should take advice on whether to make changes now or adopt a ‘wait and see’ approach. A risk/benefit analysis on each option is essential.
• Thousands of employment tribunal claims for underpaid holiday (based on unpaid commission) had been stayed pending the outcome of the EAT’s decision in British Gas v Lock. Given the prospect of an appeal by British Gas, it seems likely that those proceedings will remain stayed pending the outcome.

If you have any queries about the decision or would like to discuss your holiday pay arrangements please contact David Smedley or Andrew Rayment.