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Commission payments and holiday pay

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Commission paymentsshould be included in holiday pay.

The Leicester EmploymentTribunal has now delivered its decision in the case of Lock andOthers v British Gas Trading Limited.

The case concerned Mr Lock anEnergy Trader whose remuneration comprised of a basic salary plusthe commission earned by him on sales achieved. Thecommission element of Mr Lock's pay was significant and on averageexceeded his basic pay. The commission was paid in arrears,sometimes weeks or even months after the sales to which itrelated.

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

The payments made to Mr Lockwere in line with Regulation 16 (2) of the Working Time Regulations1998 which in turn provided that Sections 221 -224 of theEmployment Rights Act 1996 should apply to the calculation ofholiday pay. Sections 221 - 224 of the Employment Rights Act1996 nor Regulation 16 provided for the inclusion of commission inthe calculation of a week's pay.

Mr Lock had complained to theLeicester Employment Tribunal to the effect that he had suffered anunlawful deduction from wages in respect of a period of annualleave. As Mr Lock was not able to work during the holidayperiod and had not therefore, completed any sales this would bereflected in lower commission payments in the period following theleave.

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

The Leicester EmploymentTribunal referred the matter to the European Court of Justice for apreliminary hearing given the conflict between domestic and EULaw.

The European Court of Justiceheld that commission payments must be taken into account whencalculating holiday pay under the European Working TimeDirective. The case was then returned to the EmploymentTribunal to decide whether the Working Time Regulations could beinterpreted so as to give effect to European Law.

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

Although, the Tribunal was notbound to follow the EAT's decision in Bear, the Tribunalnevertheless endorsed its reasoning and saw "no difference inprinciple between payment for non-guaranteed overtime and paymentin respect of commission so far as annual leave pay isconcerned".

The Tribunal then consideredhow best to interpret the Working Time Regulations in accordancewith the requirements of the Directive.

The Tribunal decided that itwould read and apply the legislation as if it contained a newRegulation 16 (3) (e). In consequence, commissionpayments will be included in the calculation of holiday payhowever, this interpretation will only apply to the calculation ofholiday pay in respect of leave taken under Regulation 13 of theWorking Time Regulations namely the four week's holiday providedfor in those Regulations. The extra 1.4 weeks annual leave isunaffected by this decision.

The decision does not addressthe reference period for calculating the average commission to beincluded in a weeks' pay but if in doubt or where there are peaksand troughs in performance, commission due, for example, due toseasonable fluctuations we would recommend an average over a 12month period.

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.

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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