Should Holiday Pay Now Include ‘Commission Payments’ And ‘Overtime’?

Yes, according to a recent decision from the Court of Justice of the European Union (“CJEU”) in Lock v British Gas Trading Ltd.  Employers need to be aware of two recent cases which could have a significant impact on how much employees are paid when they take holidays.

Where an individual’s weekly pay is not a fixed sum, the UK courts have historically based earnings on an average over the preceding 12 weeks and this sum is used when paying the employee during a period of annual leave.  The issue of what is included in this pay has been subject to recent debate in two cases.

In Lock, the CJEU considered the case of Mr Lock, a salesman, employed by British Gas who was paid a basic salary plus commission of any sales achieved.   Whilst on holiday Mr Lock did not receive payment for the commission that he could have generated during this period and brought a claim in the Employment Tribunal (“ET”).  The CJEU considered whether there was an “intrinsic link” between the work required to be done under the contract and the commission paid.  The CJEU decided that there was such a link and as commission was not paid during periods of annual leave that this acted as a disincentive to taking leave.

The CJEU has stated that this position is not compatible with the Working Time Directive and should be sent to an ET for it to decide how commission should be included in holiday pay. We now have to wait for an ET’s decision on the issue to provide clarification regarding how these sums should be factored in.  

The other case of relevance is Williams v British Airways, where the ECJ (as it was then) stated that payments made to airline pilots which are “intrinsically linked” to the employee’s performance of their contract should be included in holiday payments.  Recent ET decisions have confirmed this position although their decisions are not binding and we are awaiting the outcome of their appeals (due to be heard in late July this year).   

In terms of the practical impact for employers, this is potentially going to be an administrative headache as well as a financial burden.  Many questions remain unanswered such as how overtime will be calculated – which reference period will be used? Also will the right to overtime and commission apply to the four week period as specified by the Directive or will it apply to the additional 8 days as allowed under the Working Time Regulations (“WTR”)?

Should you amend your policies to take account of these decisions? Certainly, if it can be said that an employee’s overtime or commission payments are ‘intrinsically linked’ to the performance of their job, then you should consider whether this will have an impact on your business.  This may well involve a consideration of your remuneration packages and how and when overtime and commission are paid.

Some employers may consider any action unnecessary pending a decision from a higher court but there is a risk that claims could be brought for back pay of these lost payments during periods of annual leave.  An employee has three months from the date of the last deduction to bring a claim under the WTR or the Employment Rights Act (ERA).  However, if the claim is brought as a deduction of wages claim under the ERA the employee could argue that there has been a “series of deductions”.  This could be potentially very expensive for employers as there is no limit on how far back the series of deductions can go (unlike for example the six year limitation period for equal pay claims).  We anticipate that this will provoke arguments from employers whether the claims brought are out of time or not.   

Employers may want to consider making financial provisions for back dated claims for commission and overtime payments whilst on holiday to take account of these decisions.  For those industries where commission payments peak during specific periods this would clearly be the most advantageous time for employees to take holidays (if the past 12 weeks’ salary is used as the reference period). This may be the time to review your commission arrangements and consider whether commission payments could be restructured, for example, they might be spread more evenly over the year.  However, until we have a steer from the ETs or in the event that the Government addresses the issue, which appears unlikely, in the absence of any guidance on how these payments should be calculated then the position remains far from clear.