Holiday pay and commission – Lock v British Gas decision to be appealed

Napthens - May 22nd 2015

Further to our recent update regarding commission and holiday pay, in the case of Lock v British Gas (Lock) it has now been revealed that British Gas will appeal against the Employment Tribunal’s (ET) decision that commission payments should be taken into account when calculating holiday pay.

The appeal also relates to the earlier decision regarding holiday pay and overtime in Fulton v Bear Scotland (Fulton).

Background

In November 2014 in the case of Fulton, the Employment Appeal Tribunal (EAT) held that EU law could be read in such a way that non-guaranteed overtime should be included in the calculation of holiday pay.  Unexpectedly, it was announced that this case would not be appealed.

In March 2015, the ET held in the case of Lock that wording should be read into the Working Time Regulations 1998 (WTR) to allow commission to be taken into account when calculating an employee’s holiday pay.  This meant that any commission intrinsically linked to a worker’s performance would be included in the worker’s holiday pay.  In the Lock judgment, the ET made reference to the Fulton decision, however failed to clarify the correct reference period to be used for calculating a worker’s pay.

The appeal

British Gas has now announced plans to appeal to the EAT on the following grounds:

  • Commission and non-guaranteed overtime are dealt with under different provisions, which use different language, so the ET incorrectly concluded that Fulton had a bearing on the outcome in Lock.
  • In any event the decision in Fulton incorrectly concluded our domestic legislation could be interpreted ‘purposively’ to give effect to EU law.

The effect of the appeal

The appeal is likely to be heard towards the end of the year.  Existing claims against employers are likely to be stayed, pending the outcome of the appeal.

Whilst the appeal will not change the fact that EU law requires UK law to provide for holiday pay to be based on ‘normal remuneration’ it does raise the question as to whether a change in UK legislation is required first of all.  This creates an element of legal uncertainty as to whether employers should change how they calculate holiday pay now (if they have not done so already), or wait for further developments in the courts.

In our view, the ultimate position regarding the calculation of holiday pay is unlikely to change.  European case law makes it clear that a worker’s holiday pay should be equivalent to the amount that they would receive during a normal working week, to avoid dissuading the worker from taking holidays.  If a worker would typically receive commission as part of their overall pay package, the EAT is likely to confirm that this should be included in the calculation of their holiday pay.

It is hoped that the EAT will provide further clarification on how holiday pay calculations should be undertaken and in particular, the correct reference period to be used.

The decision that gaps of 3 months or more between underpaid holidays will break the chain of underpayments, thereby limiting the scope of back pay claims (as decided in Fulton)  will not be challenged.  The government also still plans to introduce a 2 year cap on back pay claims which will take effect for claims on or after 1 July 2015.

Our advice going forward

Although some employers will choose to wait for the outcome of the Lock appeal before changing their holiday pay practices (to include commission) in our view the safest way forward is to take commission into account when  calculating holiday pay, sooner rather than later, on the basis that the law on holiday pay and commission is unlikely to change.

By choosing to wait for the outcome of the appeal, employers run the risk of allowing back pay claims to increase in value. The outcome of the appeal is also likely to attract widespread media coverage, which may ‘tip off’ workers about their entitlement to bring such claims.  By changing holiday pay calculations now, employers may be able to break the chain of underpayments, thereby reducing the chance of back pay claims being received.

For those employers who do wish to wait for the outcome of the appeal before taking any action, our advice is to set aside a fund to cover the holiday pay that might ultimately be claimed, once the outcome of the appeal is known.

Any employers who have already received claims for underpaid holidays relating to commission should request that they be stayed, pending the outcome of the appeal.