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After the Court of Appeal upheld the previous rulings in the Lock v British Gas case, which held that British Gas should include commission in the calculation of Mr Lock’s holiday pay, the Supreme Court has refused British Gas permission to appeal any further. Whilst this finally confirms that commission should be included in holiday pay calculations and employees will be able to continue to make claims to Tribunals on this basis, it does mean that there will not be the opportunity to have the Supreme Court provide any clarity on the practicalities of how commission should be calculated during annual leave.

Who is affected?

Employers who include commission as part of employees’ reward packages.

How we got here

Mr Lock brought a claim for unlawful deduction from wages in the Employment Tribunal on the basis that taking annual leave meant that he could not generate sales for British Gas during this time, so his commission was lower on his return from holiday than if he had worked. He claimed that this was a disincentive against taking annual leave and that holiday pay should therefore include a sum representing the commission he would have earned if he had been at work.

The European Court of Justice (ECJ) held that the EU’s Working Time Directive requires commission to be included when calculating holiday pay (which applies to the 4 weeks’ statutory holiday) on the basis that employees must receive their “normal remuneration” when on holiday and commission constitutes “normal remuneration” because it is “intrinsically linked to the performance of tasks under the worker’s contract”.  When the matter was referred back to the Employment Tribunal from the ECJ for a decision on the facts, the Tribunal held that certain words should be read into UK law (which is derived from the EU Working Time Directive) in order to give effect to the EU Directive and the ECJ’s judgment. The Court of Appeal endorsed this approach and the Supreme Court has decided that this is as far as the argument should go.

What does this mean?

Whilst there is now certainty that commission should be included in holiday pay, we still have no clarity on how that should be calculated in practice. Mr Lock’s case will be remitted to an Employment Tribunal to determine the amount he is owed, which will hopefully provide clarity as to  how such holiday pay should be calculated.

What happens next?

Employees may make claims for historic underpayments but any compensation awarded in respect of unpaid holiday will be limited to two years prior to the date of the claim.

What should you be doing?

In order to limit the likelihood of future claims, employers could consider including commission in holiday payments going forward, albeit without any guidance from the tribunals at this stage as to how to calculate it.  Employees will only be able to bring a claim if they can show that they have suffered an unlawful deduction in the past three months so once a practice of paying commission in holiday pay is sufficiently established, this could help to mitigate the risk of employees bringing claims.

In the meantime, you should also consider:

• How many employees are affected in your organisation?
• Consider what flexibility you have in the contracts of employment to amend, withdraw or replace any commission scheme (bear in mind that if commission has been paid regularly for a long period of time it is likely to be contractual through custom and practice so you will need employees’ consent to do this)
• If you choose not to change the scheme, consider how you might calculate commission during annual leave going forwards
• Quantify the cost going forwards
• Quantify the potential liability in the event of claims for back pay dating back 2 years

The issues raised are complex and we would be very happy to speak to you about any of the points highlighted above so please do not hesitate to get in touch with the team.

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