“Disappointing”: legal experts react to Lock holiday pay decision

Employers must wait for clarification on the reference period for calculating holiday pay

Employment lawyers have reacted to the long-awaited judgment published this week in the case of Lock v British Gas Trading.

This important case made the headlines last year after an employment tribunal asked the European Court of Justice for clarification on whether or not commission payments should be included in holiday pay.

The case concerned Mr Lock, a sales consultant with British Gas, who claimed that he was owed outstanding holiday pay on the basis that what he was paid did not reflect his potential earnings from commission.

The ECJ concluded that, because Mr Lock’s commission was directly related to work he carried out, it should be included.

It then handed the decision back to a Leicester employment tribunal to work out how the ruling should apply both to Lock’s case and how employers should calculate holiday pay in general.

In response, the employment tribunal has now applied an extra subsection to the Working Time Regulations 1998 so that they comply with the Working Time Directive.

The added subsection (3e) reads as follows:

“e) 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.

However, while the judgment confirms the ECJ ruling and clarifies its application through this addition to the legislation, employers will be frustrated that some areas are still unclear, in particular the reference period for calculating holiday pay.

According to Adam Ohringer, a barrister specialising in employment at Cloisters, the following questions remain unanswered:

  • Where a commission scheme is deliberately structured to compensate employees for annual leave, is there still a requirement to include commission in the holiday pay calculations under the Regulations?
  • If regard must be had to commission normally received when calculating holiday pay, what is the correct reference period for calculating the average commission to be included in a week’s pay?

Suzanne Tyrrell, senior associate at Taylor Wessing, said the decision was “disappointing” for employers who operate commission plans.

She said: “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.”

In terms of estimating if they might owe money, employers will have to wait until the second part of the judgement is delivered, said Sarah Thompson, an employment lawyer at McGuireWoods. “The crucial ruling is how to calculate the commission element of holiday pay. Until this decision, employers will not know how to calculate holiday pay and therefore how much they will need to set aside to reimburse employees if claims are made, and to pay employees during their annual leave in the future,” she says.

Beverley Sunderland, director at Crossland Employment Solicitors, agreed: “Employers had very much hoped that the tribunal would have made a decision on the reference period for calculating holiday pay to give them some certainty when devising schemes and making the calculations. The judgment specifically says that the reference period will be determined at a later date, which indicates that there is a potential change coming.”

She added that, at the moment, the new wording imported into the Working Time Regulations by the decision provides a 12-week reference period, which “could potentially give a windfall to those employees who work in businesses which have peaks and troughs”.

Thompson said it was unlikely we would see a decision on the “more complicated and critical matter” of how employers should calculate pay until at least the end of May.

She added: “The decision could also be appealed, which means it could be another 12 to 18 months before employees and employers get certainty over the amount of back-pay owed.”

Jonathan Dowden, payroll expert at accounting software company Sage, said that small businesses could suffer if forced to recalculate pay. He said: “Although we are yet to see the full judgment, the impact on SMEs’ cashflow has the potential to be quite large. Our advice to SMEs is to get their house in order sooner rather than later when it comes to understanding, calculating and applying the changes to holiday pay.”

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