Earning commission while on holiday: answered and unanswered questions

27 March 2015


Lock v British Gas Trading Ltd returned to the Employment Tribunal in February to consider whether the UK's legislation can (A) be interpreted in line with the Court of Justice of the European Union (CJEU) decision and, if so, (B) how much holiday pay Mr Lock was entitled to. On 25 March 2015, the Tribunal delivered its partial decision.

We have the answer to question A but not to question B. As expected, the Employment Tribunal has found that there is no obstacle to interpreting the Working Time Regulations 1998 so as to include commission payments in the calculation of holiday pay in respect of the four weeks' annual leave under regulation 13. The effect of the decision is that commission that couldn't be earned due to a worker being on holiday in accordance with regulation 13 must be taken into account in the subsequent pay period. This will inevitably lead to a considerable rise in holiday pay bills for many employers and a calculation headache.

Mr Lock's long-running case is not over yet as we still await an answer to question B. When it comes to commission payments, what has been decided so far and what important practical questions are still outstanding?

Lock v British Gas Trading Ltd facts

Mr Lock was employed by British Gas as an Internal Energy Sales Consultant. His remuneration consists of two main components: a basic salary and commission. The commission, also payable on a monthly basis, is calculated on the basis of the sales made by Mr Lock. It is paid not at the time that the sales are made, but several weeks or months following the conclusion of the contract between British Gas and the client. On average, the commission element made up 60% of his monthly pay.

Mr Lock was on holiday from 19 December 2011 to 3 January 2012. His holiday pay included not only his basic salary, but also the commission resulting from sales achieved during previous weeks, BUT he could not generate any commission during the period of his annual leave which had an adverse effect on his pay during the months following his annual leave.

Decision of the CJEU - commission must be included

Before the CJEU, British Gas acknowledged that the purpose of holiday pay is to put the worker, during that period of rest, in a situation which is, as regards his pay, comparable to periods of work. It went on to argue that this objective was achieved since Mr Lock received, during his annual leave, pay which included not only his basic salary, but also the commission resulting from sales achieved during previous weeks.

The CJEU rejected that argument. There was still a financial disadvantage which, although deferred, was nonetheless genuinely suffered by him during the period following that leave. As British Gas conceded, the worker does not generate any commission during the period of his annual leave.

Consequently, in the period following his annual leave the worker is only paid his basic salary. That adverse financial impact may deter the worker from actually taking leave, which is all the more likely in a situation such as Mr Lock's, in which commission represents on average over 60% of his monthly wage. This would be contrary to the intention of the Directive.

Decision of the CJEU - calculating the commission payable during annual leave

The CJEU observed that holiday pay must, in principle, be determined in such a way as to correspond to the normal remuneration received by the worker. In the case of Mr Lock, the commission was directly linked to his work within the company. It would follow that such commission must be taken into account in the calculation of the total annual remuneration. In other words, commission that couldn't be earned due to a worker being on holiday must be taken into account in the subsequent pay period.

As to the actual calculations, the CJEU simply states it is for the UK court or tribunal to determine, on the basis of an average over a reference period which is considered to be representative.

Questions remitted back to the Employment Tribunal

Following the CJEU reference, the case returned to the Employment Tribunal which identified the following outstanding questions/issues:

  1. Whether the Working Time Regulations are capable of being read so as to be consistent with European law?
  2. If the answer to 1 is yes, did the relevant commission scheme operate in such a way that it effectively compensated for the period of annual leave so that even if such a scheme is unlawful no further money is due to Mr Lock?
  3. If holiday pay is due, what is the correct reference period for determination in the calculation?
  4. Whether the principles in the CJEU decision apply solely to the four weeks leave referred to in regulation 13 or whether they apply to the whole of the 5.6 weeks leave granted by regulation 13A?
  5. To quantify the claim.

What the Employment Tribunal has decided

The Employment Tribunal has now ruled on questions 1 and 4 but not questions 2,3 and 5:

Question 4 was dealt with first and very quickly. Following the decision in Bear Scotland Ltd v Fulton & others regarding overtime payments (see our alert dated 4 November, 'Important holiday pay judgment handed down'), it is now settled law that the principles in the CJEU decisions only apply to the four weeks leave referred to in regulation 13.

As regards question 1, there is no obstacle to interpreting the Working Time Regulations 1998 (WTR) so as to include commission payments in the calculation of holiday pay in respect of the four weeks' annual leave under regulation 13.

The Employment Tribunal noted that the Employment Appeal Tribunal in Bear Scotland Ltd v Fulton had concluded that the WTR were capable of being interpreted so as to require non-guaranteed overtime to be included in the calculation. The tribunal endorsed its reasoning, and saw "'no difference in principle between payment for non-guaranteed overtime and payment in respect of commission so far as annual leave pay is concerned"'.

It followed that it was necessary for the tribunal to read words in the WTR in order to overcome the current incompatibility with EU law. By way of judicial legislative drafting, the Employment Tribunal has held that regulation 16(3) WTR is to be interpreted and applied as if it had added to it:

"as if, in the case of the entitlement under Regulation 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purpose of section 221."

What the Employment Tribunal has NOT YET decided

  • How much holiday pay Mr Lock was entitled to remains unanswered. Questions 2, 3 and 5 have been set aside for determination at a later date.Did British Gas' practice of using a commission rate set so as take account of holiday periods - in other words inclusion of an element of 'rolled-up' holiday pay - means that Mr Lock had no loss?
  • 'Rolled-up' holiday pay is a practice of including a specific part of a worker's wages (or in this case a specific part of the commission payment) as representing holiday pay. While the use of 'rolled-up' holiday pay generally has been held to be unlawful under earlier European case law (Robinson-Steele v RD Retail Services), how does this apply to commission? In practical terms what is the loss?
  • What is the 'appropriate reference period'? For example is a 12-week or a 12-month reference period appropriate?
  • What exactly is Mr Lock's loss?

What does this mean for employers?

The effect of the decision is that commission that couldn't be earned due to a worker being on holiday must be taken into account in the subsequent pay period. What we don't know as yet is what happens where the commission rate includes an element of unlawful 'rolled-up' holiday pay.

We also have further confirmation that the European case law on holiday pay calculations only applies to the regulation 13 leave (four weeks). However, splitting out the additional 1.6 weeks leave may prove to be an administrative headache and more trouble than it is worth.

More complicated and costly holiday pay calculations seem inevitable. This case, together with Bear Scotland Ltd v Fulton, means holiday payment calculations are moving towards being based on workers' average earnings in 'an appropriate reference period' leading up to their holiday for an ever-increasing group of workers (not just those without normal working hours).

Watch this space for the next and hopefully final instalment in this chapter of the holiday pay saga.


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