Employment Law Bulletin October 2016

Tuesday 25 October 2016

Welcome to the latest MH employment bulletin. In a change to the proceedings, this week we focus on one case, dealing with the vexed issue of holiday pay…

Holiday Pay Must Include Commission

Those of you who keep an eye on developments in employment law will be all too aware of the long-running saga of how to calculate holiday pay.

The Court of Appeal’s decision in British Gas Trading Ltd v Lock and anor gives some clarity, but it is not welcome news for employers.

Under the Working Time Regulations 1998 (WTR), where an employee has “normal working hours” and their remuneration varies with the amount of work done, holiday pay is calculated using an average of remuneration over the previous 12 weeks. Previously it was understood that commission is not included in this calculation, since it does not vary with the amount of work done, but rather the success of the work.

This interpretation has now been found to be inconsistent with the EU Working Time Directive, with the European Court of Justice saying the holiday pay should reflect “normal remuneration” which would include commission.

Mr Lock was an energy trader for whom commission represented a very substantial part of his earnings – about 60% of his basic pay. When he went took holiday, he continued to receive his basic pay and commission based on his earlier sales. However, since he had not been generating sales while on holiday, his commission payments were lower during the period that following the holiday.  So, should his holiday pay reflect that he usually earns commission?

Eventually, after going up to the European Court of Justice and back, the Court of Appeal has said that yes it should. In short, when calculating the basic four weeks’ annual leave under the WTR, results-based commission payments can and should be included in the calculation.

The manner of the decision is controversial, since it involved not so much “interpreting” the UK legislation as effectively rewriting it – inserting an entirely new provision so as to make the WTR consistent with the Working Time Directive.

The outcome may seem sensible at first glance – so that holiday pay reflects “normal” pay. However, it does lead to the odd concept of receiving commission in respect of sales that the employee did not actually complete (and indeed, did not occur) and could create significant extra cost for the employer.

The Court of Appeal did leave some other loose ends – for example, it remains unclear whether this would apply to, say, an employee who receives a results-based annual bonus, or a “worker” who receives commission only when a particular level of turnover or profit is achieved. The uncertainty in this area is therefore likely to continue for some time.  For now, though, if you have workers who receive commission, you should be revisiting your holiday pay policy to check that it is compliant.

If you have any concerns regarding holiday pay, do contact us.

MH Contact Bob Cordan