Employers Warned: Holiday Pay Must Include Commission

On Friday, the Court of Appeal finally handed down its decision in the long running holiday pay case of British Gas v Lock.

In its unanimous judgment, the Court of Appeal ruled that holiday pay should include a sum in respect of results-based commission where it forms part of a worker’s normal remuneration.

Background

Mr Lock was employed by British Gas in a sales role. As well as basic salary he was paid commission on sales achieved which amounted to 60% of his overall remuneration for the work that he undertook. However, when on annual leave Mr Lock’s pay comprised of basic salary only.

In 2012 Mr Lock pursued a claim in the Employment Tribunal asserting that he was owed pay on the basis that his then employer, British Gas, had not calculated his holiday pay correctly as it had not taken into account the commission he would have earned had he worked.

As part of his claim, Mr Lock argued that calculating holiday pay in the way that British Gas did operated as a disincentive for employees to take their entitlement to annual leave which was contrary to EU law.

The case has so far been heard by the European Court of Justice (ECJ), the Employment Tribunal, the Employment Appeal Tribunal (EAT), and now the Court of Appeal.

The Court of Appeal has now provided clarification, upholding previous decisions, by confirming that where commission is directly and intrinsically linked to the job it must be included in holiday pay.

Significance of this decision for employers

The case is significant for all employers that pay commission or make other payments to workers in addition to their basic salary that are in some way intrinsic to the job.

Whilst this decision is not new, it does provide clarity as to what should be included in holiday pay.  The decision confirms that when calculating annual leave payments commission payments should be included.

Many larger establishments have already revised the way in which they calculate holiday pay but this case is a stark reminder to all businesses, large and small, that calculating annual leave correctly is something that cannot be ignored otherwise, the door will be wide open for costly claims to be pursued against them.

This long running saga is far from over as British Gas has now applied for permission to appeal to the Supreme Court.

However, despite the implications of an appeal, employers should review their existing arrangements as to how holiday pay is calculated to mitigate liability and to put measures in place to calculate leave in light of this decision going forward. This is particularly critical for businesses that continue to pay basic pay only for periods of leave when other payments, most notably commission, need to be included.

For more information and a practical guidance note about what should/ should not be included in holiday pay please contact Miss Lisa Kemp.

This article has been prepared for guidance and information purposes only and should not be substituted for legal advice.