The right to commission in holiday pay unLocked by UK Judgment
A UK Tribunal has decided that employees who are paid commission, must have lost commission taken into account in some of their holiday pay.
A UK Tribunal has decided that employees who are paid commission, must have lost commission taken into account in some of their holiday pay. The Judgment in the case of Lock v British Gas Trading follows on from the European Court decision in the same case and the ground-breaking Bear Scotland Judgment. This Judgment is important for all employers who pay commission to employees. However, as with previous annual leave Judgments, it leaves many questions to be decided and therefore much uncertainty about how annual leave should be paid in practice.
60% of Mr Lock’s average total take home pay was commission, the rest was basic pay. When he took annual leave he did not sell. Accordingly there was a disincentive for him to take leave, because he could not generate commission whilst on leave.
When this case was heard by the European Court it determined very clearly that European law required that a worker must be paid in respect of periods of annual leave by reference to the commission payments he would have earned during that period, had he not taken leave. This Judgment of Leicester Employment Tribunal has now confirmed this applies directly in UK law to all employers. That is important because the wording of the UK Working Time Regulations needs to be altered for that to be the case. This Tribunal has said it is correct to do so.
The technical decision of this Tribunal is that the UK Regulations should be read so that any worker with normal working hours whose remuneration includes commission or similar payment, shall be dealt with in the same way for leave as an employee whose remuneration varies with the amount of work done. That would appear to mean that employees with a commission element to their pay must be paid during annual leave based upon their actual average earnings. This is probably to be done using the last twelve weeks pay prior to the date leave is taken, to work out pay during leave (which must be in addition to any commission paid during leave referable to a time when in work).
What does this mean for me?
This Judgment is important for any organisation who has a commission element to pay. The way the Judgment is worded means that any employee with any commission element, must have that commission reflected in annual leave pay. There is no distinction made for employees who earn relatively small or infrequent amounts of commission, it applies to all of your employees who earn any commission at all.
The decision is clear in identifying that it applies to pay for the four weeks of European annual leave only, not the additional 1.6 weeks required by UK law (or any additional contractual leave you may apply). Do consider whether you want to draw this distinction in calculating leave pay.
There are a number of key questions left undecided. The Judgment does not decide what Mr Lock should recover from his claim, which is difficult to work out. It does not even confirm whether using a twelve week period (as used in the UK Regulations) is correct, although the Tribunal’s solution may appear to suggest that is the right approach. It is even arguable that the outcome doesn’t really address the problem – Mr Lock’s issue was not with what he received in pay whilst he was away, it was the lost opportunity to earn commission to which he objected. If you have employees who earn commission less frequently or more inconsistently than Mr Lock, how this Judgment works for them will be even harder to identify.
In practice this Judgment is one small step in unlocking the impact of the European holiday cases on the UK. It is “only” a Judgment of an Employment Tribunal and is likely to be appealed. However it re-affirms the application of those European Judgments to all UK employers. This makes it even more important to carry out an audit of your approach to holiday pay to identify areas of risk. This Judgment may make grievances and claims more likely.
We know that approaches to commission and other incentive payments vary hugely. What impact annual leave has upon your employees’ ability to earn will vary from role to role, and will depend upon what the employee is selling and how you have incentivised them to do so. These annual leave Judgments do not provide a one-size fits all answer to what you should do. This claim (and others) will almost inevitably be appealed (albeit we now know that the Bear Scotland Judgment itself will not be). Our experience is that some organisations are waiting to see what happens before making changes or waiting until they receive grievances or claims. If doing so, please do make sure that your decision is based upon a genuine review of the risk and potential claims, not a fingers-crossed approach. For employers who pay significant incentives alongside basic pay, this Judgment could potentially be very expensive.
If this alert raises any issues for your organisation please speak to your usual contact in the Weightmans employment team. You can also contact Phil Allen, Partner in our Manchester Office firstname.lastname@example.org.