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Annual leave and calculation of holiday pay – commission payments must be included

The Employment Appeal Tribunal (EAT) has confirmed in Lock v British Gas Trading Limited and others that the Working Time Regulations (WTR) can be interpreted in line with the Working Time Directive (WTD) which requires commission to be taken into account when calculating holiday pay.

Following the EAT’s decision it is important for employers to be aware that, if they have not already done so, they will have ensure that any commission paid to workers is reflected in their holiday pay. Mr Lock, a sales consultant for British Gas, was paid commission on a monthly basis. On average, commission made up about 60 percent of his pay. When he took annual leave he did not generate any commission, and, when calculating his holiday pay, his employer took only his basic pay into account. Mr Lock brought an employment tribunal claim for outstanding holiday pay.

The issue of whether commission should be included in holiday pay has proved to be a long-running one. The tribunal referred Mr Lock’s case to the Court of Justice of the European Union (CJEU) asking if the WTD requires commission to be included in holiday pay. When the CJEU replied in the affirmative the matter was remitted back to the employment tribunal which considered that the WTR should be interpreted to conform with the WTD. In other words workers whose remuneration includes commission or similar payments should have these elements included in any calculation of holiday pay.

Helen Cookson, Employment senior associate at Trowers & Hamlins, commented: “It seems there’s now little room for doubt that commission and overtime, both guaranteed and non-guaranteed (where the worker is obliged to work overtime if required), will have to be included in holiday pay. This will lead to additional expense for employers who need to be aware that a failure to include such payments will open the floodgates to a whole succession of unlawful deductions from wages claims. One consolation for employers will be that, under the Deduction from Wages (Limitation) Regulations 2014, there is now a two year backstop on claims for holiday pay which are made on or after 1 July 2015.”

Ambiguity remains, however, as to the correct reference period on which a calculation of holiday pay should be based. When the CJEU heard the case of Lock it ruled that holiday pay must correspond to the worker’s “normal remuneration” and that this was a matter for the national courts to work out by taking an average over a reference period that it “considered to be representative”. Rather unhelpfully for employers the issue of the practicalities of how such payments should be calculated still remains to be determined. It is likely that, in the meantime, tribunals will approach the issue on a case-by-case basis.