If commission should be included in holiday pay, what reference period should be used to calculate how much an employee normally earns? Ruth Christy explains why confusion remains following the employment tribunal judgment in Lock v British Gas Trading.
Holiday pay reference periods
Many commentators have expressed disappointment in the recent Lock decision, stating that it does not resolve a number of key questions.
In particular, what reference period should be used to calculate commission, now that it has to be included in holiday pay?
Despite apparently not dealing with the question of the holiday pay reference period, the additional wording “added” to the Working Time Regulations 1998 (WTR) by the employment tribunal’s decision appears to point to a 12-week average.
However, lawyers and commentators are not agreed on this, and some comments in the judgment are rather misleading.
What was the tribunal ruling supposed to cover?
The employment judge first set out the issues left to decide after the European Court of Justice (ECJ) ruling last summer. The parties had already agreed that the ECJ ruling applied just to the statutory EU-derived four weeks’ holiday, not the UK’s additional 1.6 weeks’ leave. The other issues identified were:
- whether or not the WTR and the calculation of a week’s pay could be interpreted in line with the ECJ’s decision, despite previous UK case law that decided commission was not included;
- whether or not British Gas’s commission scheme effectively compensated for holiday, meaning that Mr Lock suffered no loss;
- over which period to calculate the commission; and
- the amount Mr Lock was owed.
The judge said he was only dealing with the first point above, and that the remaining issues were “set aside for determination at a later date, depending on the outcome of this hearing”. It is probably this statement that has led to most commentators concluding that no holiday pay reference period was decided on.
Taken to its logical conclusion, the reference period for calculating holiday pay including commission has apparently been decided.”
As has been well-publicised, the judge went on to decide that the WTR can be interpreted in line with the ECJ’s ruling, by “adding” words to clarify that commission or similar payments should be included in the calculation of holiday pay. He did not address any other kinds of payment, such as discretionary bonuses.
Implied 12-week holiday pay reference period
After 102 paragraphs on whether or not the WTR can be interpreted compatibly with the ECJ ruling by “adding” wording, only six paragraphs of the employment tribunal’s judgment discuss what that wording should actually be.
So what effect does the additional wording have? The wording added into the WTR deals with how s.221 of the Employment Rights Act 1996 applies to pay that includes commission.
Section 221 sets out how to calculate a week’s pay depending on whether or not the worker’s pay varies with the amount of work done. Under previous case law, commission was not considered to be pay which “varied with the amount of work done”, so, under s.221, a week’s pay for workers with normal working hours was taken to be the normal rate of pay for their contractual hours, excluding commission.
By contrast, the tribunal’s added wording deems a worker with normal working hours, whose pay includes commission or similar payment such as Mr Lock, to have pay that “varies with the amount of work done”.
The judgment does not suggest that any wording was proposed by the lawyers for British Gas, or that there were arguments against the wording proposed by Mr Lock’s lawyers (which was eventually adopted).
In these circumstances, s.221(3) provides that a week’s pay is calculated on the average rate of pay for the preceding 12 weeks. Taken to its logical conclusion, the reference period for calculating holiday pay including commission has apparently been decided.
What does this mean in practice?
Whether or not the tribunal intended this (bearing in mind its earlier comment), and whether it could be appealed, or adjusted at a later hearing, is uncertain. As it is at employment tribunal-level only, the decision is not binding on other tribunals.
Importantly, in many industries, a 12-week average could be entirely unrepresentative of normal pay, depending on when holiday is taken. It could lead to artificially high levels of holiday pay after peak periods.
The ECJ accepted that holiday pay must correspond to normal pay, and directed that national courts should assess how to calculate commission on the basis of “an average over a reference period which is considered to be representative”. For some, 12 weeks will not be representative.
So, what should HR professionals do about the calculation of holiday pay? From this decision, for workers like Mr Lock with normal working hours, it seems likely that a week’s holiday pay should be calculated on the basis of the average hourly rate of pay (including commission) for the 12 weeks ending with the last full week before the holiday, multiplied by normal working hours.
However, this could change. Employers for whom 12 weeks are not representative may choose to wait, although further clarification could be months away.
There remains the question of historic underpayments, and also the point, not addressed in this judgment, about the inability to generate future commission whilst on holiday. So, even with some answers, uncertainty remains.