In November 2014, in our Newsletter No. 87, we reported on the case of Bear Scotland, which said that overtime should be included in holiday pay calculations, if it is a normal part of an employee’s remuneration.
Since then, many of our clients have changed the way they pay holiday pay in respect of such overtime. More recently, the Employment Appeal Tribunal (EAT) in British Gas v Lock has confirmed that, the same logic should apply to commission payments. This is hardly surprising, as the case had previously been to the European Court of Justice (ECJ) who had ruled against British Gas, but had to remit the case to the British Courts to apply the ruling to UK law. The ECJ had concluded that because his commission was directly linked to the work Mr Lock carried out, it must be taken into account when calculating holiday pay.
The EAT’s technical judgment decided that the UK’s Working Time Regulations can be interpreted compatibly with the EU Working Time Directive, so as to include commission payments in the calculation of holiday pay in respect of four weeks’ annual. Parliament’s purpose in enacting the Regulations was to comply with its obligation to fully implement the Directive. It is permissible, and indeed necessary, to imply words into the Working Time Regulations 1998 to comply with EU law. The judge refused to criticise the previous EAT case of Bear Scotland, deciding that if that case was wrongly decided then the Court of Appeal must decide that, not the EAT. We will, therefore, have to wait for the Court of Appeal to have an opportunity to consider the decisions in Bear Scotland and the British Gas cases.
Mr Lock worked for British Gas and earned commission on sales, which represented around 60% of his pay. When he took holiday, his commission payments in subsequent months were lower because he had been unable to generate sales whilst on holiday. There remain other outstanding questions for a Tribunal to consider, including whether British Gas’s scheme operates, so as to effectively compensate for periods of annual leave so that no further money is due.
Unfortunately, the judgment does not shed any light on a number of practical issues. A further Employment Tribunal hearing will now be required to determine how much compensation British Gas must pay the claimant, to compensate him for the missing commission payments. The Tribunal will also need to decide the relevant reference period for calculating the commission, and whether this should be the previous 12 weeks, the previous 12 months or some other period. The European Court of Justice simply said this was a matter for national courts to determine, by taking an average over a period they considered to be representative. Whatever the Tribunal decide will not bind any other Tribunal, so it may take some time (years potentially) to get definitive rulings. A very large number of commission based Tribunal claims have apparently been stayed (suspended) pending the outcome of this case.
One point that is clear from other cases – and had already been accepted by the Tribunal – is that only the four weeks of paid annual leave entitlement deriving from the WTD will be affected by the result. It is, therefore, open to employers should they decide to pay commission (or overtime pay), to only do so for 20 days per annum and pay basic pay on public holidays, or holidays they provide in excess of the statutory minimum. Employers can decide their policy on how to treat the additional 1.6 weeks’ statutory minimum leave, and any additional contractual entitlement, but may decide to include pay for commission/overtime in all holiday pay to avoid complicating the administration. In some cases, however, it is much simpler to just pay normal pay on public holidays, rather than doing calculations.
Given the potential appeal, and the questions yet to be considered by the Tribunal, employers have a dilemma. They can:
- Maintain a “wait and see” approach to commission-based holiday pay.
- Ensure that holiday pay includes a payment in respect of commission.
We would not recommend the first approach, as employers risk backdated claims for ‘unlawful deductions from wages’, and amongst our own client base, we know that some employees have already become aware of the changes in holiday pay calculations and are asking for back dated payments. ACAS are already saying that commission should be factored into statutory holiday pay calculations, for the four weeks of statutory annual leave required under European law. Employers should seriously consider ensuring that holiday pay includes a payment in respect of commission. They should review and consider what other elements of pay should be paid when employees take their four weeks’ annual leave provided by Reg. 13 of the Working Time Regulations, or they risk legal claims.
Limitation on a Claim for an Underpayment
The introduction of The Deduction from Wages (Limitation) Regulations 2014 means that, when making a claim for backdated deductions from wages for holiday pay, a two year cap will be placed on all claims that are brought after 1st July 2015. This means that, the period that the claim can cover will be limited to a maximum of two years. This may seem like a lot, but is better than the worst case scenarios which envisaged going back to 1999!
The logic behind ensuring that employees are not worse off by going on holiday is very difficult to argue with, and the chances of the Court of Appeal doing much more than clarifying some important details are slim. We are still surprised by the deafening silence experienced by most of our clients in respect of holiday pay, albeit many have made changes to ensure they are in control of any changes, and do not get any Tribunal claims with substantial cost and employee relations implications.
Our Consultants would be pleased to advise you on any element of the issues arising from this newsletter.