Outcome could have a serious impact on UK businesses
This week an employment tribunal has the unenviable task of trying to apply EU law on holiday pay within existing UK law on the subject.
The case Lock v British Gas has returned to an employment tribunal following a judgment from the Court of Justice of the European Union (CJEU) last year, which found that commission payments should be factored in to holiday pay calculations. The tribunal will have to decide whether the Working Time Regulations 1998 can be interpreted in line with the CJEU judgment or whether new legislation is required to incorporate this into existing UK law. The tribunal may also decide on the appropriate approach for calculating holiday pay.
Claims
The case could cause a number of businesses major headaches as a result of retrospective claims and future increased costs if it is found that employers are liable for past underpayments. This would place businesses under further financial pressure coming on top of the recent ruling in the case Bear Scotland v Fulton, which held that non-guaranteed overtime earnings should be included in holiday pay.
The current case concerned a sales consultant who was paid a basic salary plus a sales commission which made up about 60 per cent of his earnings. He took holiday in December 2011 and was paid his salary and commission earned on sales prior to taking leave. While on leave he made no sales and earned no commission. This would potentially affect his holiday pay if he had taken annual leave later in the year. He claimed this was unlawful.
European court
The CJEU said holiday pay was meant to reflect workers’ “normal remuneration” and should put workers in a position “comparable to periods of work” with regard to salary. Both the employer and the British government argued that Lock was paid in a comparable manner when on holiday. The CJEU disagreed, holding that Lock could be discouraged from taking leave if he was paid less as a result. EU law prevents employers from basing holiday pay on basic salary alone for those workers who receive commission on top of their basic pay.
On how to calculate holiday pay, the court said this “must be determined in such a way as to correspond to the normal remuneration received by the worker” and that it was for national courts to assess whether the methods adopted, based on a representative referencing period, achieved this objective.
UK law
The current UK law on including commission in holiday pay is unclear. Some cases have said results-based commission is not included in holiday pay, other cases have held it can be. The tribunal will have to decide if British Gas’ arrangements comply with EU law and if the Working Time Regulations can be construed to give effect to the intention of EU law without legislative change. Perhaps most importantly for employers, the tribunal could determine the appropriate approach to calculating holiday pay. Depending on the outcome, businesses that rely on commission-based pay could find themselves facing large financial claims and increased employment costs.
What is clear is that EU law requires commission and bonus earnings that are intrinsically linked to the work done by workers (in other words, part of normal remuneration) to be factored into the basic four weeks holiday entitlement governed by EU law. But how this should be done remains unclear, as is whether this EU principle can be shoehorned into the current wording of the Working Time Regulations.
What next?
This will only be a tribunal ruling and not a binding legal authority on other cases. A subsequent appeal is considered likely. The whole issue of what should be included in holiday pay, including overtime, is crying out for proper legislative intervention to bring clarity for employers over how it should be calculated. Employers who do not currently build commission earnings into holiday pay could find themselves facing claims for more holiday pay, given the expected publicity this case will generate.
Colin Smith is a partner in the employment team at Brachers
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