How much should you be paying an employee during their holiday? 

Following a number of cases about holiday and holiday pay, the Employment Appeal Tribunal have given their judgement on one of the leading cases on this subject.

The Law

The entitlement to holiday and holiday pay are set out in UK law in the Working Time Regulations, which states that workers are entitled to 5.6 weeks’ holiday per year.

European law regarding holiday is contained within the Working Time Directive and this stipulates that all workers must have at least 4 weeks’ paid holiday per year.

Time taken for holiday must be paid at the rate of a weeks’ pay for each week of leave and how to calculate a weeks’ pay is set out in the Employment Rights Act 1996.

There are two ways to calculate a weeks’ pay depending upon whether a worker has normal working hours or no normal working hours. Those who have normal working hours will generally have a standard rate of pay each week and therefore their weeks’ pay is calculated with reference to their hours. If they do not have normal working hours their week’s pay is calculated using their average weekly pay over the last 12 weeks. By the nature of the calculation this normally includes all pay received by the worker including overtime pay, bonuses and commission.

The Facts

In this case the employee Mr Lock worked normal hours each week for British Gas Trading Limited as an internal energy sales consultant. His pay did not vary with the amount of work he did and he received the same basic salary each month. For the purposes of the Employment Rights Act the calculation of his pay for holiday purposes would fall under the ‘normal working hours’ calculation.

Mr Lock did however receive commission on sales and this commission made up approximately 60% of his pay. The commission was paid in arrears to Mr Lock and therefore it was paid sometimes several weeks or months after the sale had been completed.

When Mr Lock went on holiday he would receive his basic salary as normal plus commission from any prior sales that fell due. However, because he was not generating any sales when on holiday, he would return to work and then in the following months have a reduced income because of the lack of sales during his holiday time.

Mr Lock brought a claim in the Employment Tribunal arguing that his holiday pay should reflect the actual income he would receive if he had been at work and not just basic pay.

Why is this case important?

The Leicester Employment Tribunal referred the case to the Court of Justice of the European Union and it was decided that Article 7(1) of the Working Time Directive requires that results-based commission paid to an employee which is not dependent on the amount of work done by that employee must be taken into account in the calculation of pay for annual leave.

The Employment Appeal Tribunal had to decide if, in the light of the judgement of the European Court, UK legislation can be interpreted in a way which is in conformity with the Working Time Directive.

This case is important as it is the lead case for a large number of results-based commission cases. The Appeal Tribunal reported that there were more than 60 such claims against British Gas in the East Midlands region alone and some 918 claims against them around the country. There are also many other such cases around the country which have been placed on hold whilst this issue is decided.

The Decision

Following the reference to the European Court the Employment Tribunal decided that they should read the Working Time Regulations to conform with European law and in turn read into the Regulations;

‘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.’

Which means that Mr Lock’s commission should be included when calculating his holiday pay.

British Gas appealed against the decision arguing that it was wrong of the Employment Tribunal to conclude that it was possible to interpret the Working Time Regulations in such a way.

The Employment Appeal Tribunal disagreed with British Gas arguments and decided that previous cases should be followed and the Working Time Regulations should be read in line with EU law.

Points to note

This is just another stage in the ongoing question of how to calculate holiday pay and what should be included. Unfortunately despite the Appeal Tribunal endorsing the earlier decisions there are still questions that remain unanswered, such as, how do you actually calculate the holiday pay? What is the reference period for working out holiday pay?

I believe that British Gas will appeal this further to the Court of Appeal and as other cases, such as Fulton v Bear Scotland Ltd, which involved overtime payments and holiday, are being appealed there is undoubtedly more to come on this issue.

What action do you need to take?

1. Consider how you pay your staff for their holiday, and whether you may be affected by these cases.
2.  Seek advice before making changes to your holiday pay calculations.
3. Watch this space for further legal developments

Case Name

Lock v British Gas – Employment Appeal Tribunal