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Employers face continued uncertainty over commission and holiday pay

Employers still face uncertainty despite a recent ruling that holiday pay should include commission and any other elements making up an employee’s pay – if ‘intrinsically linked’ to the employee’s contract of employment.

A salesman was paid both basic pay and commission on sales. The commission varied month by month, and payments in some months were the outcome 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 the basis that an employee cannot earn commission while on holiday. The employee claimed his holiday pay should take account of commission. The UK Employment Tribunal (ET) referred the question to the European Court of Justice (ECJ).

The ECJ ruled 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 – although its decision only applied to the four weeks’ holiday pay a worker is entitled to under EU law (and not the further 1.6 weeks’ pay they are also entitled to under UK law). There are limits to how far back a worker can go when claiming holiday pay due in relation to previous holidays; and if there is a gap of more than three months between underpayments an employee loses the right to claim arrears.

The ET ruling was reached by implying words into UK law in this area, to overcome incompatibility with EU principles. The employer appealed to the Employment Appeal Tribunal (EAT) on grounds it was wrong to imply words into UK law in this way. However, the EAT ruled that it was necessary (and not just possible) to imply words into UK law to ensure it complied with EU law.

The outcome of the EAT decision is that the UK regulations covering working time should be interpreted to require employers to include commission based on their sales into their holiday pay for their four weeks statutory leave.

However, for employers, this may not be the end of this long-running matter. It is likely the employer will now take its case to the Court of Appeal.

In a separate case, the previous ruling that an employee loses their right to have commission included in holiday pay if there is a gap of more than 3 months between underpayments is also likely to be challenged in the Court of Appeal.

Generally, the decisions to date leave open a number of important questions, including:

  • The decisions in this case relate solely to commission. This leaves open whether other forms of variable pay, such as voluntary overtime or bonuses, could also be ‘intrinsically linked’ to an employee’s contract of employment, and should also be taken into account when calculating holiday pay. However, the ET said it could see no distinction in principle between commission and voluntary overtime
  • The ET deferred the issue of which reference period should be used to calculate the holiday pay of workers earning commission – although the most likely outcome is that it will be based on average commission over the last 12 weeks
  • It is still unclear whether employers must include commission when calculating holiday pay if the rates of commission paid already take into account the fact that employees will not earn commission during holidays
  • It is also unclear whether an employer could argue that commission (or voluntary overtime) 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, one-off sale in the 12 weeks before his holiday, should their holiday pay be inflated accordingly? If it should, they could be paid far more holiday pay than they would have earned during that period if they had stayed at work – and employees may be tempted to time their holidays to take maximum advantage

Employers who have not been including commission in holiday pay may also need to consider whether they (or scheme members) should increase contributions into staff pension schemes, and top up previous contributions.

Operative date

  • Now

Recommendations

  • Employers with staff who are paid 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 unclear how these should be calculated
  • Employers in holiday pay disputes that have been put on hold may choose to keep them on hold pending a Court of Appeal decision
  • Employers should also consider the implications of the decision on employees share schemes

Case ref: British Gas Trading Ltd v Lock & Anor [2016] UKEAT 0189_15_2202

27 May 2016

Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice.