Employment Appeal Tribunal confirms commission should be included in holiday pay

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

The Employment Appeal Tribunal (“EAT”) has upheld the finding of the employment tribunal in the case of Lock v British Gas Trading Limited that the Working Time Regulations 1998 (“WTR”) can and should be read to require employers to include commission paid to workers when calculating the rate of pay for the basic statutory four weeks’ holiday entitlement.

The original employment tribunal gave its judgment back in March 2015, having referred the case to the European Court of Justice (“ECJ”), which ruled that commission must be taken into account in the calculation of the remuneration in respect of the four weeks’ annual leave entitlement under the European Working Time Directive (“Directive”), emphasising that excluding commission from the calculation of holiday pay could deter a worker from exercising their right to annual leave, given the financial disadvantage they would suffer. Applying the ECJ’s ruling, the tribunal stated that the WTR should be read so that “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 [calculating a week’s pay]”.

In reaching its decision, the tribunal also referred to the judgment of the EAT in the case of Bear Scotland Ltd v Fulton and others, which had held that payments in respect of non-guaranteed overtime should be included for the purpose of calculating holiday pay. The tribunal considered that there was no difference in principle between payment for non-guaranteed overtime and payment in respect of commission so far as holiday pay is concerned and therefore no reason why a case involving commission should be treated differently.

On appeal, British Gas argued that commission and non-guaranteed overtime are dealt with under different provisions and the tribunal had been wrong to decide that Bear Scotland had any bearing on the outcome of Lock. It also argued that the EAT in Bear Scotland incorrectly concluded that domestic legislation could be interpreted purposively to give effect to the ECJ ruling in Lock and that the EAT in this case should not therefore follow that decision.

Rejecting the appeal, the EAT confirmed that the principles set out by the EAT in Bear Scotland in respect of non-guaranteed overtime and holiday pay applied equally in respect of the commission payments in Mr Lock’s case. Further the EAT in this case had no basis to depart from the decision of the EAT in Bear Scotland - the WTR can and should be interpreted in line with the ECJ’s ruling and so as to reflect the intention of the Directive.

Practical advice

• Whilst the EAT merely confirmed the position on commission and holiday pay already made clear by the ECJ, we now have a decision by a UK appellate court specifically in respect of commission which will be directly binding on other tribunals. Therefore pending any further appeal, the case provides more certainty as to how similar cases will be decided in the tribunals.
• The judgment does not address the question of how holiday pay should be calculated to take account of commission. However, the approach taken by the tribunal in adding the wording noted above to the WTR suggests that the reference period for such calculations should be the period of twelve weeks immediately preceding the holiday (excluding any weeks where no remuneration was paid for any reason).
• The judgment and the ECJ principles only apply to the basic four week annual leave entitlement under Regulation 13 of the WTR, not the additional 1.6 weeks under Regulation 13A of the WTR.
• Since 1 July 2015 the Deduction from Wages (Limitation) Regulations 2014 have imposed a two-year limit on most claims for backdated unlawful deductions from wages, including claims for holiday pay.