March 26, 2015

Another day trip in the holiday pay saga

The Employment Tribunal in Lock v British Gas Trading Ltd has decided that where a worker's pay includes commission, then 4 weeks of their statutory holiday entitlement should be calculated so as to include commission payments. Broadly, the calculation would involve taking an average of pay and commission over a 12 week reference period. Historically, workers with normal working hours have received holiday pay based on basic pay which has not included other forms of pay such as commission or overtime.

The decision follows on from last May's European Court of Justice (ECJ) decision in the case of Lock v British Gas (Case C-539/12) and is the latest in the continuing saga of holiday pay decisions.  Doubtless, it will not be the last.

Background to the decision

Mr Lock was employed by British Gas as an internal energy sales consultant. He was paid a fixed basic salary together with a variable commission calculated by reference to sales achieved, rather than the time worked. His commission made up approximately 60% of his total remuneration and was paid in arrears, several weeks or months after a sale. He took annual leave over the Christmas period in December 2011 and was paid his basic salary plus the commission from previous sales that fell due during the period. However, as he was unable to earn commission during his annual leave, his salary payments over the coming months suffered a reduction because he was unable to generate commission over the Christmas period. He brought a claim in the Employment Tribunal for lost holiday pay.

The European Working Time Directive gives workers the right to paid annual leave but does not specify how holiday pay should be calculated.  In the UK, these rules are laid down in the Working Time Regulations (WTRegs). These rules provide that commission is not included in the calculation of holiday pay.   In May 2014, the ECJ  ruled in Lock v British Gas that holiday pay should include sales based commission. However, the ECJ did not specify precisely how this should be done so the case was referred back to the Employment Tribunal to consider this.

The decision

The Tribunal therefore was asked to consider whether the UK rules could be interpreted to reflect EU law.  The UK courts have, on a number of previous occasions, done this by adding or deleting words of the UK legislation.  So the Tribunal, having considered carefully the guidelines of the previous decisions on this matter, decided that it was "permissible, indeed necessary" to add wording to regulation 16(3) WTRegs so that the UK rules can be interpreted in line with EU law.

The Tribunal preferred the suggestion of counsel for Mr Lock, which was to read and apply the legislation as if it contained a new Reg 16(3)(e). Thus, for the purposes of determining a week's pay, Ss.221-224 Employment Rights Act 1996 (ERA) shall apply "as if, in the case of the entitlement under Reg 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purpose of section 221".

What do these additional words mean?

It follows from this additional wording that for workers whose remuneration includes commission or similar payments, their holiday pay is calculated by reference to an average hourly rate of remuneration payable over a 12 week reference period, and would take commission into account in that calculation (this reflects the wording set out in section 221(3) ERA which relates to workers with normal working hours whose remuneration varies with the amount of work done – traditionally referred to as "piece workers")).

But does this adequately reflect the ECJ's interpretation of the Directive on how holiday pay should be calculated?

The ECJ said that remuneration paid in respect of annual leave should be the "normal remuneration" received by the worker.  Mr Lock was unable to earn commission during his leave so there is a time lag between the actual work that triggers commission and payment (as, in common with many similar schemes, payment was triggered only when the customer contract went "live"). Therefore, the shortfall in pay does not occur whilst the worker is on holiday - it occurs later.  This brings into question whether the 12 week averaging out before someone goes on holiday actually would be compliant with the EU requirements in terms of "normal remuneration".  Also, bearing in mind commission is often variable, with peaks and troughs throughout the year, taking an average of only 12 weeks' remuneration just before each holiday is taken is not always going to be representative of "normal remuneration".

Whilst the issue of the appropriate reference period appears to have been set aside to be dealt with separately, the Judge's  conclusion to add this additional wording indicates that he was satisfied that a 12 week reference period does adequately reflect the EU principles set out in the ECJ's decision in Lock.  Further, the additional wording included was that suggested by Mr Lock's lawyers, so it seems safe to assume that the reference period worked to Mr Lock's satisfaction. Whether it will do so for all commission based workers, is of course open to question.  There will be another hearing to quantify Mr Lock's specific monetary claim and this will be determined as a separate issue, unless the parties are able to agree in the meantime.

There is no indication as to whether British Gas may seek to appeal/review the decision.

Decision confined to the 4 weeks' EU holiday

It is important to note that the decision only concerns the 4 weeks' statutory holiday entitlement derived from the EU Working Time Directive. It therefore does not impact on the calculation of holiday pay for the additional 1.6 weeks provided for in the WTRegs or any additional contractual holiday pay. For employers seeking to adopt a "basic compliance only" approach, the case offers further comfort that they may, technically, treat different tranches of leave separately. Whether the cash saving in so doing is worthwhile compared to the administrative, systems and employee relations/communications challenges of differential treatment, will need to be assessed.

A note of caution:

As the Judge was keen to clarify, this case deals only with commission "or similar" payments, and it does not deal with other payments such as discretionary bonuses, overtime payments, call out or standby allowances etc.  However, the case is further evidence that the UK Tribunals and Courts are prepared to adopt an "expansive" and broad approach to what should be included in holiday pay and use the 12 week reference period (which has for many years been applicable for employees with no normal working hours or shift workers). In practice, it may well be preferable, in terms of overall fairness and simplicity, to adopt a 52 week or annual reference period and to take a perhaps modest compliance risk where this does not "work" for particular workers in specific cases.

In summary…

Your strategy to deal with both legacy and the future position on holiday pay should reflect the specific circumstances of your organisation and be a holistic, commercial one – which, of course, takes into account the legal risks but is not driven solely by it. What is your risk and how are you going to deal with it?

For further reading on holiday pay, including the recent cases dealing with whether overtime should be included in the calculation of holiday pay, see our previous alerts:

Click here to view the Employment Tribunal decision