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Results-based commission must be factored into holiday pay

Most full-time workers in the UK are entitled to 5.6 weeks holiday every year. Under EU law, “normal remuneration” must be paid for four weeks of this leave, based on the employee’s usual salary.

However, somewhat inconveniently for businesses, the UK Working Time Directive does not specify how statutory holiday pay should be calculated. As such, establishing an employee’s ‘normal remuneration’ can be difficult, particularly when you add payments such as overtime, allowances, and commission into the mix.

The complexity of this issue has been highlighted in a recent Employment Appeal Tribunal (EAT) decision[1].

The recent case

In this case, Mr Lock, a British Gas salesman launched an employment claim, disputing the holiday pay given to him.

Mr Lock received “results based” commissions based on the number and type of contracts his customers entered into. This commission was earned in addition to his base salary and made up approximately 60% of his pay.

This variable payment was not included as part of his holiday pay entitlement calculation as it did not reflect the amount of work done by Mr Lock, only the success of that work.

As this commission could not be earned when he was on annual leave, Mr Lock argued that this pay structure was a disincentive to taking holidays, and that not taking account of his commission when calculating his holiday pay entitlement was in breach of EU law.

The EAT has now agreed that results based commission should be factored into holiday pay calculations.

What is normal remuneration?

The EU has long considered ‘normal remuneration’ to include elements such as commission.

Historically in the UK, payments such as overtime and commission did not need to be included in holiday pay calculations for employees with normal working hours.

However, in 2014, another case[2] looked at whether non-guaranteed overtime should be factored into holiday pay, and the Court found in favour of employees, stating that, in this case, UK law should be interpreted to comply with EU law.

Using this as a precedent, Mr Locks’ lawyers argued that UK domestic law should be interpreted to achieve consistency and conformity with EU law and the court agreed.

However, while variable payments such as results based commission must now be considered as part of any holiday pay calculation, what the EAT didn’t do was provide any more information as to the practical application of this decision, for example, the calculation needed to establish “normal remuneration”.

What does this mean for businesses?

British Gas is expected to appeal this decision, so the situation may not yet be settled. That said, it does seem likely that commission and other such payments will need to be taken into account by businesses when calculating an employee’s holiday pay.

Worryingly, for many employers, there is now the real risk of backdated holiday pay claims being made against them. As such, businesses considering making changes to their holiday pay arrangements, or faced with claims for back pay should now consider their positions very carefully.

If you are concerned about the impact of this, or any other employment law issue, please contact Linder Myers today.

Contact our employment team

[1] Lock v British Gas 

[2] Bear Scotland v Fulton

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