Case Law Update: Holiday pay and commission

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The Attorney General has given an Opinion that commission should be taken into account when calculating a worker’s pay for statutory holiday under the European Working Time Directive. This is after holiday pay questions in the employment tribunal case of Lock v British Gas Trading Ltd were referred to the Court of Justice of the European Union.

Background

The Working Time Regulations (WTR) state that a worker must be paid at the rate of a week’s pay for each week of our 5.6 weeks’ statutory minimum holiday. A “week’s pay” is to be calculated in accordance with detailed provisions set out in the Employment Rights Act 1996 (ERA).

Until recent case law cast doubt on this, it was understood that the “week’s pay” provisions would operate in certain circumstances to exclude variable components of a worker’s remuneration from holiday pay. However, there are arguments brewing that the holiday pay rules of the WTR and the ERA do not accord with the requirements of the Working Time Directive (WTD), in that they will not always result in workers receiving “normal remuneration” for the 4 weeks’ holiday provided under the WTD.

Case facts

Mr Lock was a British Gas salesman whose remuneration consisted of two elements, basic pay and commission. The commission was paid in arrears, based on sales achieved during previous weeks and therefore fluctuated from month to month.

Relying on the provisions of the WTR and ERA as to the calculation of holiday pay, the employer did not include commission payments in Mr Lock’s holiday pay.

Employment Tribunal claim

Mr Lock brought a claim in the employment tribunal for outstanding holiday pay on the basis that the holiday pay he had received did not reflect what he would have earned from commission during his holiday.

A-G Opinion

The employment tribunal referred to the Court of Justice of the European Union (CJEU) the question of whether in these circumstances pay for the 4 weeks minimum holiday required by the WTD should include commission payments.

The CJEU process is that the Attorney General (AG) gives an advance opinion before the full Court decides the case and whilst his opinion is not decisive it is often very influential. The AG said that Mr Lock should receive “normal remuneration” during the holiday, and this must comprise more than basic pay.

The AG in this case referred to the earlier CJEU case of Williams and others v British Airways, a test case involving over 2,500 pilots. Williams found that, under the WTD, workers were entitled to “normal remuneration” for holiday and that this comprises not only basic salary but also other elements of pay “intrinsically linked” to tasks contractually required of the worker, such as various flying allowances.

Here the AG found that Mr Lock’s commission had the necessary “intrinsic link” with the contractual tasks, i.e. the sales for British Gas, required of him. Whilst the commission fluctuated from month to month, it was nevertheless a constant component and therefore sufficiently permanent to form part of “normal remuneration”.

The AG was of the view that it should be left to the national court or tribunal to determine methods and rules for including a variable component of remuneration into holiday pay. However, he considered that it could involve in Mr Lock’s case taking into account the average amount of commission received over a representative period (e.g the previous 12 months). The CJEU decision is expected next year and this will be binding on UK courts.

The other pending case on holiday pay

Earlier this year, the employment tribunal in Neal v Freightliner was faced with the issue of overtime payments and the application of the WTR/ERA formula. In that case the question was whether the employer was right to have relied on the “week’s pay” provisions in the ERA to exclude overtime (which was not both compulsory and guaranteed) from the holiday pay of an employee with a fixed number of contractual hours.

The tribunal found that the employer should have included the overtime. This decision also relied heavily on Williams and its “normal remuneration” requirement.

The Neal v Freightliner decision is only at tribunal level and does not currently have to be followed by other employment tribunals. However, it is being appealed and so we will in due course have a decision on the issue of holiday pay from the employment appeal tribunal (EAT), which will then be authoritative for tribunals.

EEF assistance

The pending CJEU decision in Lock v British Gas Trading Ltd and EAT decision in Neal v Freightliner are likely to be significant for our members. The judgments may be directly relevant where overtime and/or commission payments form part of employees’ remuneration. They should also signal the correct approach going forward to the inclusion of other variable components of remuneration in holiday pay, e.g. bonus payments.

Whilst the judgments will relate only to the 4 weeks WTD holiday, and not to the additional 1.6 weeks under the WTR or any additional contractual holiday, this still covers the majority of a worker’s holiday entitlement. In addition, and due to administrative difficulties, our members are not always able to distinguish between the different types of holiday.

EEF will, of course, keep you informed of these decisions. In addition, we are already undertaking preparatory work considering how we can assist you if the judgments mean that your current holiday pay approach is problematic. For example, steps that you may want to consider, or discuss with your EEF adviser, include:

  • Estimating the level of risk for the company if claims are brought
  • Budgeting for holiday payments to include overtime/commission/other variable elements
  • Checking your record keeping with regard to working time and overtime
  • Investigating whether your payroll system can calculate holiday pay in different ways (including whether it can distinguish between WTD holiday, the additional WTR holiday and any additional contractual holiday)
  • Ensuring that the status of overtime is clear.

Irrespective of the outcome of these cases, you could consider making a payment of holiday pay at the “correct” rate (i.e including overtime/commission payments) in order to break the series of deductions from wages and so put previous potential claims from employees out of time in the tribunals although this has the disadvantage of flagging up the issue to employees and conceding the issue before the courts have ruled upon it.

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