The Working Time Directive provides for all workers to receive a minimum amount of paid annual leave each year. The Directive is implemented into UK law by the Working Time Regulations 1998 which make it clear that workers are entitled to be paid whilst on annual leave at the rate of a weeks’ pay. For most workers the calculation of a weeks’ pay is relatively straightforward. However, uncertainty has arisen in relation to workers who earn commission in addition to a basic salary.
After years of litigation, Mr Lock’s case has finally reached its conclusion and in so doing confirms that results- based commission should be included in the calculation of holiday pay.
The facts of the case
Mr Lock was employed by British Gas as an Energy Sales Consultant. His remuneration was made up of basic pay (40%) and commission (60%). Mr Lock would earn commission on any sales he made and would receive it several weeks or months later. Mr Lock took a period of annual leave in 2010. During his leave, he received his basic salary in addition to commission payments he was entitled to from previous sales he had completed. In the months following his return to work however, Mr Lock’s pay reduced to reflect the lack of sales and consequently commission he earned during his annual leave. He brought an unlawful deduction from wages claim in the Employment Tribunal for unpaid holiday pay relating to his commission payments.
Mr Lock’s claim has been considered by the Employment Tribunal, European Court of Justice (“ECJ”), the Employment Appeal Tribunal and the Court of Appeal. He has succeeded at every stage with both the UK Courts and the ECJ agreeing that results-based commission should be included in the calculation of holiday pay. British Gas has been unwilling to accept these decisions however and most recently they sought leave to appeal to the Supreme Court. Their application was refused however signalling the end of the long battle for Mr Lock.
So where are we now?
The decision in Lock makes it clear that results-based commission must be included in holiday pay. We also know, following the case of Bear Scotland Ltd v Fulton, that guaranteed and non-guaranteed overtime should also be taken in to account when calculating holiday pay. Where an employer fails to do so employees have 3 months to bring an unlawful deduction from wages claim. It is possible for employees to claim historical underpayments going back a maximum of 2 years provided there is less than 3 months between each deduction.
How should you calculate holiday pay?
Unfortunately, despite Mr Lock’s case being considered by vitally every court in the land and the ECJ, we still have no clear guidance on exactly how these elements of remuneration should be taken in to account when calculating holiday pay. The Courts have stated that employers should use a “representative” reference period and the Advocate General in Lock suggested that 12 months may be appropriate. Without any decision on this point however we cannot be sure what reference period will be acceptable.
In our opinion the reference period may well vary depending on the worker’s situation. For example, it may be a 12 week period is appropriate for individuals who work consistently throughout the year and earn regular amounts of commission. The same period may not be appropriate however for seasonal workers. In that situation a 12 month period may be more appropriate.
As we see it there are two potential options open to employers now. Which option you choose is likely to depend on the nature of your workforce and whether they are aware of the Lock decision. If you already have staff querying their holiday pay you may want to calculate your historical liability to them now and make a payment to prevent them issuing proceedings against you. To do this you will need to decide which reference period you consider most appropriate for your workforce (i.e. 12 weeks or 12 months) and work out their average commission and/or overtime payments during that time. You would then need to change your systems to ensure future holiday pay includes these elements.
The advantage with this option is that you are taking control and in doing so hopefully minimising the risk of the company being drawn in to costly litigation. The risk however is that you may end up paying them too little or too much depending on the reference period you adopt. Whilst we have no decision at present on the appropriate period to use we are likely to see a decision soon given the importance of the issue and there is a risk any decision may contradict the reference period you have used.
Alternatively, if you suspect your employees are unaware of the decision, you may prefer to wait and see if they challenge any historical holiday payments. In the meantime you should start to include commission and/or overtime in their future holiday pay. By doing so you may find that any employees who do subsequently decide to issuing proceedings for back dated holiday pay may well be out of time.
Employers need to give both options careful consideration in light of the nature of their workforce and the relationship they have with their staff. If you would like to discuss how best to manage holiday pay please contact a member of our Employment Team.