Results Based Commissions and Holiday Pay in the UK

The Employment Appeal Tribunal has today issued its judgment in the case of Lock v British Gas in which it has confirmed that, in order to comply with EU law, the UK Working Time Regulations should be interpreted to provide that “results based” commissions are to be factored into the pay due to employees in respect of their four week basic statutory holiday entitlement. 

Mr Lock was a British Gas salesman who received, in addition to his base salary, commissions based on the number and type of contracts his customers entered into – these “results based” commissions did not depend on how much work was done. When on holiday Mr Lock could not earn any commission and was paid only his basic salary and any prior commission which fell to be paid during his holiday. Mr Lock argued that this structure was a disincentive to taking annual leave, that not to include commissions in his holiday pay was contrary to the requirements of EU law, and that the Working Time Regulations 1998 should be construed so that his pay for his statutory holiday pay should reflect commissions. 

In the earlier case of Bear Scotland v Fulton the Employment Appeal Tribunal had held that the Working Time Regulations 1998 should be interpreted to comply with EU law and therefore to require employers to reflect non-guaranteed overtime payments in holiday pay in respect of the four week “basic” holiday entitlement which they confer. 

In the Lock case, the Court of Justice of the European Union had held that the EU Working Time Directive required Mr Lock’s results based commissions to be taken into account when calculating his holiday pay because this commission was directly linked to the work which he did. The employment tribunal then took the same approach to interpreting the domestic law in order to comply with EU law as the Employment Appeal Tribunal had done in Bear Scotland. The employment tribunal read into the Working Time Regulations 1998 wording to entitle Mr Lock to have his holiday pay reflect his commissions. The Employment Appeal Tribunal has now today dismissed an appeal by British Gas against that decision and concluded that the employment tribunal had been correct to apply the same approach as was followed in Bear Scotland and to interpret the Working Time Regulations 1998 to require results based commissions to be reflected in employees’ holiday pay for their four week basic leave entitlement. 

It is understood that British Gas has sought leave to appeal to the Court of Appeal. Consequently, the situation with regard to results based commission has not necessarily finally been settled, although the direction of travel very much appears to be towards commissions and overtime – whether guaranteed, compulsory or voluntary – counting towards holiday pay for the basic four week Working Time Regulations entitlement. Employers who are facing existing holiday pay claims which have been stayed pending the Lock decision will presumably wish those cases to remain stayed. Those employers considering making changes to their holiday pay arrangements or seeking to address existing or possible claims for back pay will need to consider their positions carefully not least in view of the fact that the issue of the “reference period” for the purposes of calculating the commission or overtime element of holiday pay has not yet been resolved in the case law. The period over which commissions or overtime should be averaged when determining holiday pay is an issue which the Court of Justice left for national law to determine and employers will need to consider carefully how to address that issue.