Calculating holiday pay – don’t forget to include commission and overtime

A recent Employment Appeal Tribunal (EAT) decision has handed down an important decision on the correct calculation of holiday pay.

The decision concerned an appeal by British Gas that holiday pay should not be calculated to include results-based commission as well as basic pay.

Sarah Begley, employment lawyer at The Wilkes Partnership comments: “This decision has important implications for workers who normally receive commission or undertake overtime, but up until now have only been paid for their basic pay when they take annual leave”.

The background to the case of Lock v British Gas is that Mr Lock was employed by British Gas as a sales consultant. His remuneration package included a basic salary plus commission that was based on the number and type of contracts he persuaded customers to enter into. This aspect was fairly substantial as it amounted to 60% of his overall pay. However, when he took periods of annual leave he was paid his basic salary plus the commission from previous sales that fell due during the period. What he did not receive was commission for the period during which he was on leave, thereby losing income in the future by taking leave.

At the earlier Court of Justice of the European Union (CJEU) stage, the CJEU had found that Mr Lock’s commission was “intrinsically linked” to the performance of the tasks required under his contract of employment and therefore his statutory holiday pay should include an amount to reflect the commission he would have earned had he not taken leave.

The EAT held that domestic UK legislation could be interpreted in a way which conforms to the requirements of Article 7 of the EU Working Time Directive. It rejected arguments that its decision in another recent case on this issue Bear Scotland & Others v Fulton & Others (concerning guaranteed overtime, which we reported on in November 2014) could be distinguished from this case or was incorrectly decided and should not be followed.

Commenting on the decision, Sarah Begley adds: “In most cases employers should ensure that their employees are paid holiday based on both their basic pay and any commission they earn. This only applies to employee entitlement to statutory annual leave under the EU legislation (i.e. four weeks’ holiday) and not any additional holiday entitlement.

“Unfortunately, the decision does not provide clarity on the practical question of what is an appropriate reference period for averaging pay. Pending a definitive ruling, some legal uncertainty therefore remains about how to specifically calculate claims for underpaid holiday and holiday pay going forward”.

We understand that British Gas is seeking permission to appeal against the EAT’s decision to the Court of Appeal.

If you would like more information on how this decision could affect your business, please contact Sarah Begley on 0121 733 4000 or any member of the Employment Team.

Sign up for our newsletter

Scroll to Top