Holiday Pay to Include Commission: The Lock Decision

The long awaited decision in Lock v British Gas has finally been handed down by the Employment Tribunal (ET).

Background

Mr Lock worked as a sales consultant for British Gas where he received a basic salary of £1,222.50 per month plus commission in arrears.  The commission varied month to month according to how many sales he made, however it was integral to his income as it often constituted about 60% of his overall pay.  The problem faced by Mr Lock was that his pay, whilst on annual leave, only included his basic salary; he received nothing in terms of commission.  This obviously had a negative impact on Mr Lock’s income following a period of annual leave as it gave him no incentive to take a break from work. Mr Lock brought a claim in the ET for unlawful deduction from wages in respect of the ‘lost’ holiday pay for a period of leave he took in December 2011 and January 2012.

The Law

Under the EU Working Time Directive which is implemented in UK legislation through the Working Time Regulations 1998 (WTR), every worker has the right to take four weeks’ paid annual leave.  In Lock, the ET had to consider whether pay received during periods of annual leave should include an element of commission that a sales person (such as Mr Lock) would have received had he not taken the holiday.

The ET referred the issue to the European Court of Justice (ECJ) for a Preliminary Ruling. The ECJ held that even though Mr Lock’s commission fluctuated, it was still directly linked to the work he carried out and so must be taken into account when calculating holiday pay.  The ECJ left the matter of calculating holiday pay in such situations to the national courts to decide.

The case then returned to the ET for determination as to whether the WTR could be interpreted to give effect to EU law. In Bear Scotland Ltd v Fulton, the Employment Appeal Tribunal held that the WTR could be interpreted to require non-guaranteed overtime to be included in the calculation for holiday pay. This reasoning was endorsed by the ET in Lock as it saw no difference in principle between payment for non-guaranteed overtime and payment in respect of commission so far as annual leave pay is concerned”.

The ET decided that Regulation 16(3) of WTR could be interpreted and applied as if it has the following paragraph added to it:

“(e) as if, in the case of the entitlement under regulation 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purpose of section 221.”

This means that an employee’s commission payments should be included in the calculation of holiday pay in respect of the four weeks’ annual leave provided by Regulation 13. As such, the ET concluded that Mr Lock had suffered an unlawful deduction from wages.

The aftermath

The decision in Lock is welcome outcome for employees, particularly those in sales-based roles.  However, employers will continue to be faced with a minefield of “costly and complicated holiday pay calculations” as they have been since Bear Scotland decision on overtime in 2014.

Employers will be comforted by the fact that there is a two-year cap on backdated holiday pay claims which will take effect from 1 July 2015.  This is due to the government introducing the Deduction from Wages (Limitation) Regulations 2014 which limits all unlawful deductions claims to two years. Unfortunately the new regulations will only apply to claims presented after 1 July 2015, so expect a raft of claims for unpaid holiday pay before they take effect.

This will in any event be a further wakeup call for employers who will now need to review their commission structures in light of their potential exposure to increased holiday pay entitlements.

Paul Kelly

Paul Kelly

Paul Kelly
Partner
Employment Department
PKelly@LawBlacks.com
0113 227 9249
@PaulLawBlacks

 

 

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