On Friday 7 October 2016, the Court of Appeal handed down the decision in British Gas Trading Limited v. Lock and Another  EWCA Civ 983. As expected, the Court of Appeal followed the Employment Appeal Tribunal’s decision that holiday pay must include compensation for results-based commission that “ordinarily” would have been earned during periods of work. The case is important as it has potentially significant financial implications for those employers that utilise commission schemes or whose employees have remuneration packages which include additional payments that are intrinsically linked to their jobs, for example overtime payments.
Background in brief
In April 2012 Mr Lock, a salesman for British Gas, presented a claim to the Employment Tribunal. He argued that British Gas had failed to correctly calculate his holiday pay. In addition to his basic salary, Mr Lock was each month paid a sum in respect of his results-based commission. Such commission payments represented more than 60% of his remuneration and were not dependent on the amount of work that Mr Lock had done, rather the success of that work. In Mr Lock’s case, his entitlement to commission was based on how many of the sales he negotiated which resulted in the customer purchasing British Gas’ energy products. Although British Gas’ commission scheme was set out in a document separate to his employment contract, it was agreed that Mr Lock had a contractual right to such commission.
The European Court of Justice (“ECJ”) had previously rejected British Gas’ claim that Mr Lock’s holiday pay was comparable to his earnings during periods of work. The company had argued that his holiday pay already included both basic salary and commission payments. Whilst on leave, Mr Lock continued to receive his salary and commission relating to sales he had achieved during the weeks preceding his holiday. However, the court recognised that by taking holiday, Mr Lock’s future remuneration would be disadvantaged as, whilst on leave, he had been unable to generate any commission. In the ECJ’s view, this might deter such a worker from taking his annual leave. The ECJ ruled that where commission is intrinsically related to the work carried out, it should be considered when calculating holiday pay.
The Court of Appeal
The key issue deliberated by the Court of Appeal (‘CoA’) was whether the UK Working Time Regulations 1998 (‘WTR’) could be interpreted to give effect to EU case law, which requires holiday pay, payable under the Working Time Directive, to include “all elements of normal pay”. In Mr Lock’s case this would include his results-based commission. The CoA agreed with the EAT and confirmed that the WTR can (and should) be read in a way that accommodates the EU interpretation of holiday pay.
The CoA has therefore now determined that holiday pay must include compensation for results-based commission that would ordinarily have been earned, but for an employee taking annual leave. The decision applies solely to those workers who have normal working hours and whose pay does not vary according to the amount of work done, rather due to the outcome of such work. It should be noted, however, that the decision to include commission in holiday pay is not intended to be applicable to staff who receive a discretionary bonus based on organisational goals or team performance.
Although British Gas’ position is yet to be confirmed, since it has approximately 1,000 workers with potential claims, it is expected to appeal the decision to the Supreme Court. However, despite the potential for appeal, employers will now be required to include relevant commission payments in any holiday pay remuneration and may face significant claims for back pay.
If you would like any further information, please contact the Andrea London of the Employment Department on 0207 955 0880. This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice, please contact us.