Tribunal confirms commission element of holiday pay

Many businesses will be aware of the case of Lock v British Gas which concerned a salesman whose earnings were largely made up of commission. In May 2014, the European Court held that Mr Lock’s holiday pay ought to include an element of commission. This was not simply the commission that Mr Lock had earned whilst working, but the commission that Mr Lock may have earned, had he not taken annual leave. Otherwise, in the view of the European Court, this was a financial disincentive which may deter the worker from taking annual leave.

The problem with that decision is that there was no finding as to how this should be dealt with and furthermore, the payment provisions in the Working Time Regulations in the UK did not anticipate commission in holiday pay.

Following the European decision, the case went back to the Employment Tribunal in the UK.

The decision, published on 25th March 2015, was that the tribunal could interpret the Working Time Regulations in order to include commission payments in the calculation of holiday pay (in respect of the 4 week statutory entitlement to annual leave derived from the Working Time Directive).

The Tribunal took account of the decision of the Employment Appeal Tribunal in Bear Scotland Ltd v Fulton (please click here for a report on the decision) of November 2014 which found that the Working Time Regulations were capable of being interpreted to include non-guaranteed overtime in the calculation of holiday pay.

It is perhaps no surprise that the Tribunal in Lock held that commission should be included. This decision follows the course of many holiday pay decisions coming from Europe.

An important factor in this new decision is the method of calculation applied by the Tribunal, a point which the European Court and the Employment Appeal Tribunal had commented on but had not made any absolute finding. In the Lock decision this week, the tribunal felt that a worker with normal working hours, whose remuneration is made up of commission which may vary with the amount of work done, has their holiday pay calculated on the basis of the average hourly rate of remuneration payable in respect of the period of 12 weeks ending with the week in which the date of calculation is made or the last complete week before the date on which the calculation is made (if the date of calculation is not at the end of the week). So, in broad terms, a 12 week reference period over which average remuneration should be calculated.

For the purposes of the calculation, the variable element, i.e. the commission or overtime, should be included as “remuneration”.

As mentioned above, this applies only to the 4 weeks’ annual leave that originally came into force when the Working Time Regulations were introduced in 1998.It does not apply to the “additional” 1.6 weeks’ leave that the UK granted in 2007, pay for which may be limited to basic salary, depending on contracts and prior practice.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you would like any further information bout the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.