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Holiday pay calculation must reflect commission

24/02/2016

Holiday pay calculation must reflect commission

On 22nd February 2016, the Employment Appeal Tribunal (EAT) handed down its decision in the long-running case of Lock v British Gas Trading Ltd. This decision means that from now on the amount that employees get paid for their holiday should be based on both their basic pay and any commission they earn.

The case involves Mr Lock - a British Gas salesperson - whose remuneration package included a basic salary plus commission, based on the number and type of contracts to which customers agreed. When he took annual leave, his remuneration comprised of his basic pay and the commission that he had earned during the previous weeks. However, as Mr Lock did not carry out any work during his period of annual leave and hence did not make any new sales or follow up on potential sales during that period, this affected his pay in the following months. It was therefore a disincentive to take annual leave. As there was an "intrinsic link" between the commission received each month by Mr Lock and the performance of the tasks that he was required to carry out under his contract of employment, the EAT held that such commission must be taken into account in the calculation of his holiday pay.

You may think this is old news as the decision was handed down by the Employment Tribunal last March, finding in favour of Mr Lock.  However, British Gas appealed this decision in the EAT, claiming it would be ‘judicial vandalism' to follow the European Court of Justice's recommendations and interpretation of the Working Time Regulations. The EAT dismissed this appeal holding that UK legislation could be interpreted in a way that conforms to the requirements of Article 7 of the EU Working Time Directive, which refers to entitlement to annual paid leave.

So what implications will this have for employers?

One practical difficulty will be how to calculate holiday taking commission into consideration.

A further consideration is whether or not employers will be able to prevent employees who earn commission from timing the completion of their sales and their annual leave to maximise their holiday pay. For example, a salesperson might try to ensure that he or she takes holiday after securing a particularly big deal or after a good sales period.

Not all the disadvantages will be on the employer's side: Employers may decide to adjust their commission schemes to offset the extra cost of including commission in holiday pay.

Finally, this is an EAT decision so it could be appealed to the Court of Appeal.

Fiona Haworth. You can contact Fiona on fiona@practical-hr.co.uk


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