Employers still face uncertainty after the Supreme Court refused to hear an appeal of a ruling that holiday pay should include contractual, results-based commission.
A salesman was paid both basic pay and commission on sales. The commission varied each month, and payments in some months were the outcome of work carried out in previous months.
While on annual leave, his employer paid him commission earned from sales made in previous months, but calculated his statutory holiday pay by reference to his basic pay only, on grounds an employee is unable to earn commission while on holiday. The salesman claimed his holiday pay should take account of commission. The UK Employment Tribunal (ET) referred the question to the Court of Justice of the European Union (CJEU).
The CJEU 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 CJEU 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 they are also entitled to under UK law). Further conditions of entitlement include limits as to how far back a worker can go when claiming holiday pay due in relation to previous holidays.
The 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 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, the Court of Appeal importantly made clear that its ruling only applied to contractual, results-based commission – not to other types of commission that employees might argue should be included when calculating their holiday pay.
The employers applied for permission to appeal the decision to the Supreme Court but this was refused.
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.
The case will now return to the ET, which will consider issues including the reference period employers should use when calculating holiday pay. It is likely to rule that the employee’s pay should be averaged over a 12-week reference period before his annual leave, a period already agreed by the parties as appropriate.
However, there may still be uncertainty as highlighted by the Court of Appeal its judgment. The court gave examples of potential uncertainty following its decision, 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 in some months, no commission is payable)
Further important questions which still arise 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 so, this could result in them being 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
Since the Supreme Court will not hear the appeal, these uncertainties remain unresolved for now.
Employers with staff who are paid contractual, results-based commission 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
Case ref: British Gas Trading Ltd v Lock UKSC 2016/0194
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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.