Rarely is a decision made in a case that has the potential to affect every single employer in the country. The decision of the European Court of Justice in Lock v British Gas is one of those decisions. If you are an employer who pays any form of commission, overtime, allowance or bonus to your workers then this decision could affect you.
The European Court of Justice is the highest form of legal court in the European Union and therefore its decision must be followed by Courts and Tribunals in the UK. In the Lock case the Court of Justice found that holiday pay must include commission earned under contractual arrangements.
When making its decision the Court was looking at the way in which the European Working Time Directive (WTD) should apply in the UK when an employer is deciding how to calculate holiday pay. The WTD is written into UK law in the form of the Working Time Regulations 1998 (WTR). The Court has interpreted the WTD as meaning that workers should receive their “normal pay” during annual leave. The WTR currently states that for employees with normal working hours their holiday pay should be calculated on the basis of a worker’s basic pay only. This is why most employers have traditionally paid basic pay only during holidays. The question for the Court was whether this approach is correct?
Under Mr Lock’s contract he received commission on sales which made up approximately 60% of his pay. He was actually paid the commission several weeks or months after sales were concluded. When Mr Lock went on holiday over Christmas and New Year, his pay included basic salary plus commission from sales made during earlier periods. However, he incurred a reduced income in the following months because he had not generated any commission when he was on leave.
Whilst Mr Lock did receive commission payments when on leave, the Court though that the practice adopted could deter workers from taking their entitlement, as they would suffer a reduction in income upon return. As such, the practice was unlawful and Mr Lock should have suffered no reduction in income as a result of taking annual leave. The Court referred to there being “an intrinsic link between the commission received each month by Mr Lock and the performance of the tasks he is required to carry out under his contract of employment” and therefore the commission should have been taken into account when calculating his holiday pay.
When making its decision the Court of Justice was mindful of the importance of the WTD in European law. The WTD was introduced for the protection of the health and safety of workers and therefore the Court found that arrangements for leave should not prevent or deter workers from taking their full entitlement to holiday.
The implications for employers are clear. If you have workers who earn commission that is “intrinsically liked” to their normal work then according to this decision the commission should be taken into account when calculating holiday pay. As commission is almost by definition variable this poses a problem for employers as it is not clear what reference period to use when calculating average pay. Under the WTR the reference period for calculating holiday pay for workers’ who’s pay varies is 12 weeks but prior to the decision in Lock the European Court’s Advocate General suggested that 12 months would be appropriate. It is also difficult for employers to know when commission becomes “intrinsically linked” to work and pay, which is obviously of crucial importance. Will it be in all cases that commission should be included in holiday pay or was it particularly relevant that Mr Lock worked in sales and a large proportion of his overall remuneration package was based on commission?
Then there are other forms of payment which fall outside what might be described as basic pay such as overtime, allowances and bonuses. How should employer’s deal with these when calculating holiday pay?
The 2011 case of Williams v British Airways gives some insight. In this case the Court of Justice decided that pilots were entitled to have a flying allowance, which was an hourly enhancement for flying time, included in their holiday pay in addition to their basic pay but not a payment that they received in consideration of expenses.
The Employment Appeal Tribunal (EAT) is due to hear a combined case on whether overtime should also be included in the calculation of holiday pay at the end of July. Whilst the employers in this case have the argument that because overtime is voluntary it should not be included, I think that it would be a brave EAT Judge who did not follow the Lock case and therefore I consider it likely that the EAT will find in favour of the workers.
The position in relation to discretionary bonuses is likely to remain unclear for some time, however the law in relation to this is clearly open to challenge due to the inadequacies of the WTR. Coming on top of recent cases relating to the accrual of annual leave during sickness absences the Lock case should provide another powerful reminder to the UK Government of the need to amend the WTR to bring them in line with European law. The sooner employers have clarity about these issues the better.
The case of Lock has ensured that holiday pay continues to be a fertile battleground for employees looking to challenge the calculation of their holiday pay and it is certain that the case will not have gone unnoticed by trade unions who have been the major sponsors of recent litigation in this area.
A very significant question is: How far back can such claims go? It seems perfectly possible for workers to bring claims dating back many years, potentially even as far as 1998 when the WTR were first introduced. Clearly this may have a very substantial impact as claims brought by multiple workers have the possibility to lead to tens if not hundreds of thousands of pounds worth of compensation. Employers need to be developing strategies over the next few months to address this new financial exposure.
It is worth remembering that the Lock case will need to return to the UK Tribunal for a decision on how it is applied in the context of the WTR and, as I have mentioned above, we have an EAT Judgment due in June on the issue of overtime and whether it should be included in holiday pay. Therefore whilst the direction of travel of the case law on holiday pay is starting to become clear, arguably it has not yet reached its final destination in the UK.
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