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ECJ ruling in Lock affects holiday pay for commission-based employees

Two faced God - Janus Print publication

26/06/2014

In ancient Roman myth, Janus was the god of beginnings and transitions, depicted as having two faces, since he looked to the future and to the past. Bringing myth to reality, (and with apologies for the tortured metaphor), looking to the future and the past is exactly what the ECJ’s decision in Lock v British Gas now requires employers to do. The decision has expensive implications (in a forward-looking sense of future wage bills and in a backwards-looking sense in relation to potentially significant claims) and it’s worth doing the groundwork now.

The ECJ’s finding, that holiday pay must include an element calculated to reflect future commission lost as a result of the employee taking leave, is, without doubt, a game-changer. It is likely to be followed by an EAT finding later this year that holiday pay should also include overtime (read on for more detail).

Overview and facts

As reported in our January Briefing this year, Mr Lock, (a sales consultant), had brought a tribunal claim against British Gas for unpaid holiday. Mr Lock was paid a basic salary plus commission (paid in arrears) for sales made in preceding periods and his commission equated to around 60 per cent of his total income. Whilst the pay he received during his holiday included commission from sales made in previous periods, he was obviously unable to make sales (and therefore generate future commission) during his holiday. The effect of him taking holiday, therefore, was that he suffered a reduced income in the period following his return to work.

His tribunal claim was stayed pending a referral to the ECJ to consider the question of whether holiday pay under the Working Time Directive (WTD) should be calculated in such a way as to reflect the ‘lost’ commission caused by being away on leave.

As a precursor to the ECJ hearing the case, the Advocate General (AG) issued an opinion that holiday pay of workers whose pay is made up of a fixed element and a regular commission (e.g. sales staff) should comprise both basic pay and an amount that reflects average commission (by reference to commission earned over a previous representative period). This opinion was based on the fact that Article 7 of the WTD is intended to enable a worker to actually take their annual leave entitlement and not be worse off as a result. In short, the policy underpinning the WTD is that workers should not be discouraged from taking their leave entitlement for financial reasons.

In coming to its decision that commission payments should be included in ‘normal pay’ and therefore be taken into account when calculating holiday pay, the ECJ rejected British Gas’s arguments that:

  • Mr Lock continued to receive commission already earned which fell due during his holiday period (because this overlooked the fact that he would be ‘worse off’ further down the line due to not being able to generate commission whilst on leave)
  • The sales targets were set to take into account holiday periods
  • The rate of commission paid took into account the fact that workers could not earn commission during holiday periods.

Implications – can workers bring claims for back-payment?

The implications of this decision are potentially significant.  Until now, the Employment Rights Act 1996 (ERA) has directed employers to exclude commission from the calculation of a ‘week’s pay’ for holiday pay purposes. This decision entirely changes that approach.

Firstly, it effectively increases the level of holiday pay for commission-based workers given that tribunals in the UK are likely to interpret the Working Time Regulations in line with the ECJ’s decision. Secondly, affected workers may seek to bring retrospective claims for previous unpaid holiday going back up to six years. We may well see a trade union bringing group litigation on this point. They will undoubtedly be considering their next steps as this article goes to press.

Is that the end of it?

As is often the case with employment law, the issue is not settled entirely. Having made its finding in principle, the ECJ did not go on to give any guidance on how employers should calculate holiday pay to effectively include the lost opportunity to earn commission whilst on leave. An ‘average’ taken over a reference period was indicated as being one approach but the ECJ did not expand on what that reference period might be. It specifically stated that it is leaving that issue for the national courts to decide and it has referred the case back to the original tribunal to determine this point.

Under the ERA, holiday pay for workers with variable working hours is calculated by reference to a 12-week reference period. The AG, however, had suggested a 12-month reference period when he gave his opinion on the case. It will therefore be very interesting to see how the tribunal in Lock decides the matter of any reference period and, moreover, whether its decision on the point is appealed. Once we have the answers to these questions the position will be a lot clearer.

Our advice to employers is to use this time to digest the impact of Lock on their own holiday pay arrangements, take stock and assess potential exposure to claims. The first step in assessing holiday pay going forward is to consider how you currently calculate ‘normal pay’ in respect of holiday periods for commission-based workers. The key question is “does this calculation take into account the fact, if true, that the worker cannot generate commission during holiday periods?”.

Exposure to claims for back pay should also be considered in order that financial provision can be made where appropriate. The categories of affected workers will need to be established, together with an assessment of the figures likely to be involved in the event of any claims for back payment.

Overtime and holiday pay

In a highly relevant and related development on 30 and 31 July 2014, the Employment Appeal Tribunal (EAT) will be hearing the appeal in the case of Neal v Freightliner Limited which centres on the issue of whether non-compulsory overtime should be included in holiday pay calculations under the Working Time Regulations. There is a significant likelihood that the EAT will find that it should be.

The overall trend of case law in this area is that where a worker’s pay consists of a basic salary and variable elements directly and intrinsically linked to work, then holiday pay should be calculated so that the worker receives pay comparable to their ‘normal’ pay whilst on holiday and is not, therefore, financially disadvantaged by taking leave.

Walker Morris Comment

Once it is available, the EAT’s finding in Neal v Freightliner Limited is likely to add grist to the mill of the ECJ’s decision in Lock and will provide further guidance for employers. In conclusion, the dust needs to settle but what seems certain for now is that a wholesale review of holiday pay arrangements and a risk/options assessment will be occupying the top of many an HR agenda over the course of this summer.

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