Commission payments and holiday pay

Commission payments should be included in holiday pay.

The Leicester Employment Tribunal has now delivered its decision in the case of Lock and Others v British Gas Trading Limited. 

The case concerned Mr Lock an Energy Trader whose remuneration comprised of a basic salary plus the commission earned by him on sales achieved.  The commission element of Mr Lock's pay was significant and on average exceeded his basic pay.  The commission was paid in arrears, sometimes weeks or even months after the sales to which it related. 

When Mr Lock took annual leave he would be paid as normal, namely he received his basic pay plus the commission that he had earned in respect of sales achieved in the weeks prior to taking the leave. 

The payments made to Mr Lock were in line with Regulation 16 (2) of the Working Time Regulations 1998 which in turn provided that Sections 221 -224 of the Employment Rights Act 1996 should apply to the calculation of holiday pay.  Sections 221 - 224 of the Employment Rights Act 1996 nor Regulation 16 provided for the inclusion of commission in the calculation of a week's pay. 

Mr Lock had complained to the Leicester Employment Tribunal to the effect that he had suffered an unlawful deduction from wages in respect of a period of annual leave.  As Mr Lock was not able to work during the holiday period and had not therefore, completed any sales this would be reflected in lower commission payments in the period following the leave. 

Mr Lock argued that since the European Court of Justice had held that holiday pay should reflect the income that a worker would usually receive had he been working, his future payments should be enhanced to reflect the commission that he would otherwise have earned during the period of annual leave.

The Leicester Employment Tribunal referred the matter to the European Court of Justice for a preliminary hearing given the conflict between domestic and EU Law.

The European Court of Justice held that commission payments must be taken into account when calculating holiday pay under the European Working Time Directive.  The case was then returned to the Employment Tribunal to decide whether the Working Time Regulations could be interpreted so as to give effect to European Law. 

The Tribunal noted that in the EAT in the much publicised case of Bear Scotland Limited v Fulton, the EAT had concluded that the Regulations were capable of being interpreted so as to require non-guaranteed overtime to be included in the calculation.

Although, the Tribunal was not bound to follow the EAT's decision in Bear, the Tribunal nevertheless endorsed its reasoning and saw "no difference in principle between payment for non-guaranteed overtime and payment in respect of commission so far as annual leave pay is concerned". 

The Tribunal then considered how best to interpret the Working Time Regulations in accordance with the requirements of the Directive. 

The Tribunal decided that it would read and apply the legislation as if it contained a new Regulation 16 (3) (e).   In consequence, commission payments will be included in the calculation of holiday pay however, this interpretation will only apply to the calculation of holiday pay in respect of leave taken under Regulation 13 of the Working Time Regulations namely the four week's holiday provided for in those Regulations.  The extra 1.4 weeks annual leave is unaffected by this decision.  

The decision does not address the reference period for calculating the average commission to be included in a weeks' pay but if in doubt or where there are peaks and troughs in performance, commission due, for example, due to seasonable fluctuations we would recommend an average over a 12 month period.

Posted on: 27/03/2015

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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