Commission payments in holiday pay: appeal lodged with Employment Appeal Tribunal

In the past few days, an appeal has been lodged with the Employment Appeal Tribunal (EAT) that casts more uncertainty over what elements of pay fall within the calculation of holiday pay. Following the recent Employment Tribunal (ET) ruling of the Lock case (Lock vs British Gas) that employers must take into account commission payments when calculating holiday pay, we understand that British Gas have lodged an appeal to the EAT.

The Lock case followed the EAT decision in 2014 regarding Bear Scotland v Fulton (known as Bear Scotland), which confirmed that certain overtime payments must be included in the holiday pay calculation. Surprisingly, this ruling wasn’t appealed further.

In the Lock case, the ET found that UK law should be interpreted in line with a previous decision made by the European Court:  commission calculated with reference to sales achieved, ‘or other similar payments’, should be included when calculating holiday pay.

The details of the appeal

We understand that British Gas is appealing the decision on the basis that non-guaranteed overtime and commission are dealt with under separate provisions, and so the ET incorrectly concluded that the Bear Scotland case on overtime impacted the outcome of the Lock case. And, even if Bear Scotland was applied correctly, British Gas will argue that the EAT in Bear Scotland incorrectly concluded that UK domestic legislation can be interpreted to give effect to EU law.

Both Bear Scotland and the Lock case only apply to workers’ four weeks’ holiday entitlement under European law.

We understand that the appeal won’t challenge the ‘three month break’ rule, identified by the EAT in Bear Scotland which remains an important protection for employers in respect of any claims. ..

It’s expected that the appeal date will be set for late 2015. In the meantime, it’s likely that cases that were waiting for the outcome of the Lock case will remain pending  until after the appeal.

What does this mean for employers?

The ET's decision is in line with other European case law and the Bear Scotland case, which found that holiday pay should reflect a worker’s ‘normal remuneration' and is currently binding on employers. Although the appeal can’t overturn the Bear Scotland decision, it could lead to a conflicting decision and so could affect claims that involve payments other than commission, including overtime.

The British Gas commission case has given some clarity for employers on the holiday pay calculation, but there are still a number of unanswered questions, including what reference period should be used for determining the amount of commission to be included in the calculation of holiday pay, and we hope things will be clearer regarding the calculation after the appeal.

It’s important to remember that the current ruling is still law and will remain so unless the EAT overturns the decision at appeal. So, as employers, you should still be considering what impact this has on your future costs and updates to payroll and HR systems, as well as any risk of historic claims.

What you can do now:

• Establish who in your workforce might be affected.

• Understand how holiday pay is currently calculated and which pay elements are included. Variable pay elements like certain overtime and commission payments should be included.

• Understand what updates your existing payroll and HR systems need to calculate holiday pay for workers on different work and pay patterns.

How we can help

Together with PwC Legal LLP, we can work with you to review the commission and overtime arrangements you have in place and provide integrated and effective tax, payroll and legal solutions. We’ll help you work out how payments are calculated, if there might be an impact and make it easier for you to take action quickly once clarification is available. Get in touch to talk about our data modelling tool that can assess any potential historical liabilities and future costs, helping you identify not just the level of potential exposure, but also which workers are likely to be able to lodge a claim and for how much. Our practical experience can help make sure that you minimise the impact and disruption around compliance going forward.

If you would like to discuss these issues in more detail, please contact Jonathan Berger on [email protected] or 0207 804 1103. Follow Jonathan on Twitter @UKEmploymentTax

@UKEmploymentTax If you would like to discuss these issues in more detail, please contact John Harding on [email protected] or 07801 042 607. Follow John on Twitter @JohnHardingPwC