Case law: Employers still face uncertainty over commission and holiday pay following Court of Appeal ruling
Employers face continued uncertainty despite the Court of Appeal confirming that holiday pay should include commission – but the ruling only applies to contractual, results-based commission.
This update was published in Legal Alert - November 2016
Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.
Please note: A newer article on this case was published in the April 2017 edition of Legal Alert following subsequent developments in the legal process.
A salesman was paid both basic pay, and commission on sales. The commission varied each month, and some months' payments were in respect of work carried out in previous months.
While he was on annual leave his employer paid him his commission earned from sales made in previous months, but calculated his statutory holiday pay by reference to his basic pay only, on grounds that an employee is unable to earn commission while on holiday. The employee claimed his holiday pay should take account of commission. The Employment Tribunal (ET) referred the issue to the European Court of Justice (ECJ).
The ECJ said that employers who pay a worker commission on sales which is 'intrinsically linked' to the performance of the tasks the worker is required to carry out, must take commission into account when calculating statutory holiday pay. It referred the case back to the ET.
The ET confirmed the ECJ decision – with the proviso that it only applied to the four weeks' holiday pay a worker is entitled to under EU law (and not the further 1.6 weeks' pay to which they are also entitled under UK law). There are also limits to how far back a worker can go when claiming holiday pay in relation to previous holidays. Other conditions also apply.
The ET's ruling was reached by implying words into UK law to make it conform to EU principles. The employer appealed to the Employment Appeal Tribunal (EAT), and then the Court of Appeal, on grounds that it was wrong to imply words into UK law in this way. However, both the EAT and the Court of Appeal ruled that it was necessary to imply the relevant words into UK law to ensure it complied with EU law.
However, very importantly, the Court of Appeal has made clear that its ruling only applies to contractual, results-based commission - not to other types of commission that employees might argue should be included when calculating their holiday pay.
The outcome is that the UK regulations covering working time should be interpreted to require employers to include contractual, results-based commission when calculating employees' holiday pay for their four weeks' statutory leave.
Unfortunately for employers, this may not be the end of this long-running matter. The employer could now take its case to the Supreme Court. There is also the possibility that the rationale behind the decision (that UK law should be interpreted to comply with the EU law from which it is derived) will no longer apply after Brexit.
More immediately, the Court of Appeal also gave the following examples where there would still be uncertainty over whether a payment should be taken into account when calculating holiday pay:
- a large, results-based bonus paid to a banker once a year;
- an employee whose commission is only payable if the business achieves certain sales or profit targets later in the year (so that, in some months, no commission is payable).
Other important questions which still appear to need clarification include:
- Whether and which types of commission other than contractual results-based commission should be taken into account.
- Whether employers must include contractual results-based commission when calculating holiday pay if their rates of commission already take into account the fact that employees will not earn commission during holidays.
- Whether an employer could argue that contractual results-based commission should not be taken into account in holiday pay in certain circumstances because the commission earned during the reference period is untypical. For example, if a salesperson has pulled off a large, freak sale just before their holiday, should their holiday pay be inflated accordingly? If it should, they could end up being paid far more holiday pay than they would have earned during that period had they stayed at work - and employees may be tempted to time their holidays to take maximum advantage.
- Employers with staff who are paid contractual, results-based commission should consider whether they should take that commission into account when calculating future holiday pay
- Employers should take specialist legal advice on the amounts of commission to be included, as it is not yet clear how these should be calculated
- Employers in holiday pay disputes that have been put on hold may be able to keep them on hold pending a Supreme Court appeal – take specialist legal advice on this issue
Case ref: British Gas Trading Ltd v Lock & Anor  EWCA Civ 983
Please note: An article published in the April 2016 edition of Legal Alert covered this case at an earlier stage in the legal process.
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.