In the latest in a long-running series of cases on holiday pay, the Employment Tribunal has handed down its first judgment in Lock v British Gas Trading Limited.

This judgment confirms the principle that workers paid commission should receive holiday pay at a rate reflecting normal income, which can include commission, rather than basic salary only.

What Has Been Decided?

The claimant argues that his holiday pay did not comply with European legislation, as it was calculated by reference to his basic salary only and did not reflect the significant element of commission that he typically received.  The case was referred to the Court of Justice of the European Union (CJEU), which ruled in favour of the claimant in late 2014.

As expected, the Tribunal has now followed the CJEU and confirmed the following:

• Commission payments of the type earned by the claimant must be taken into account when calculating holiday pay

• The relevant domestic legislation can and should be interpreted to give effect to this

• This applies to the four weeks’ annual leave entitlement conferred by the Working Time Regulations 1998 only.

This approach reflects the recent judgment of the Employment Appeal Tribunal in Bear Scotland v Fulton & Ors, which confirmed that non-guaranteed overtime should similarly be included in the calculation of holiday pay.  For further details, click here

What Happens Next?

The Tribunal will hold another hearing to determine the remaining issues in the case:

• Whether the respondent’s commission scheme operates in such a way that it already effectively compensates for periods of annual leave

• If not, which reference period should be used when calculating the amount of commission that should be included in any relevant holiday pay

• How much additional holiday pay is owed to the claimant.

There is also a strong possibility that this judgment will be appealed.

What Does This Mean for Employers?

This decision is a useful indicator of the direction of travel for holiday pay.  Employers might usefully identify any workers who work on a commission basis and assess their current holiday pay arrangements to start analysing any risk posed.

However, it is probably premature to rush to change holiday pay arrangements on the basis of this judgment, at least at this stage. Aside from the fact that the judgment itself is not binding and potentially subject to appeal, the next hearing in this case promises to deal with the more interesting practical aspects of this issue.

In particular, it will be helpful to see the Tribunal’s consideration of whether a commission scheme might already “price in” the required element of holiday pay, and what sort of flexibility employers might have to set a workable reference period when assessing the average amount of commission that should be included in holiday pay.

This is an issue that will affect different employers in different ways, and we would be delighted to discuss the best way forward for your business. In the meantime, we will look to keep you informed of any further developments in this area.