Employers must take commission payments into account when they calculate holiday pay, an employment tribunal has ruled.
In the case of Lock v Brititsh Gas, the tribunal ruled that the Working Time Regulations should be read to ensure commission is brought into the calculation for holiday pay in line with the Working Time Directive. This could potentially push up pay bills for employers that use commission schemes as a regular part of how they remunerate staff.
Until now, it has been standard practice in the UK to exclude commission when calculating employees’ holiday pay rates.
The ruling follows last year’s judgement by the Court of Justice of the European Union in the case of Lock v British Gas, which ruled that employees must receive their normal pay during periods of holiday in a manner that is consistent with the way they are paid during working hours.
That followed the Advocate General’s opinion in the case in December 2013.
The added words to the Working Time Regulation makes the UK compliant with EU law.
The decision follows a ruling in 2014 by the Employment Appeal tribunal (EAT), which stated that employers must include overtime in holiday pay calculations.
In July 2014, the EAT heard three cases on calculating holiday pay.
The change in legislation is expected to affect future holiday pay claims and can also be brought on backdated claims.
However, past claims will be limited to two years following the government’s decision to introduce a cap to protect employers from the impact of backdated claims and give workers certainty on their rights.
Suzanne Tyrrell, senior associate at law firm Taylor Wessing, said: “The decision will be a disappointing one for employers operating a commission plan and keen to keep their wage bills low.
”It means that the law is clear that where the employees have normal working hours and their pay includes commission, payment of holiday pay must take into account commission earned.
“A number of sectors are likely to be impacted by this decision, including the retail and utilities sectors, where commission schemes are regularly used to reward sales.
“What is unusual in this case is that the employment tribunal has had to add words into UK working time law to comply with EU law.
“Employers are also likely to be disappointed that a number of important questions remain unanswered, no decision has been made about the correct reference period for calculating holiday pay where an employee receives commission, and separately no decision has been made about whether British Gas’ commission scheme operated in a way that meant employees were already adequately compensated.”
Alex Payton, employment law partner at Howes Percival, added: “This case, hot on the heels of the Bear Scotland decision last year regarding overtime, will come as a further headache for employers trying to keep on top of all aspects of the payments which should be included in holiday pay.
“This decision could particularly impact employers with seasonal businesses where commission or overtime may be significantly increased at certain times of the year.
“Those employers will need to keep a close eye on when employees want to take holiday as they could maximise their holiday pay by requesting holiday immediately after a lucrative commission or overtime period.”