Will British Gas ECJ ruling fuel holiday pay hike?

The European Court of Justice (ECJ) recently ruled that the EU law requires a worker’s statutory holiday pay to take commission payments into account: it should not be based solely on basic salary (Lock v British Gas Trading Ltd). The case isn’t over yet, but its outcome is potentially costly for employers with workers who are entitled to commission.

Mr Lock, an energy salesman for British Gas, is paid a basic salary and a sales commission on a monthly basis. His sales commission makes up around 60 per cent of his remuneration package. When he took two weeks’ annual leave in December 2012, he was paid his basic salary and also received commission from previous sales that fell due during that period.

Mr Lock obviously didn’t generate any new sales while he was on holiday, which meant that in the period afterwards he suffered a reduced income through lack of commission. He brought an employment tribunal claim asserting that this amounted to a breach of the Working Time Regulations 1998 (WTR).

The legal background

This case highlights a simmering conflict between UK and European law as to how holiday pay should be calculated. The EU Working Time Directive (WTD) states that workers have the right to at least four weeks’ paid annual leave, but doesn’t say how holiday pay should be assessed. However, three years ago the ECJ ruled that the WTD required holiday pay to be based on “normal remuneration”, including any payments linked intrinsically to the performance of the worker’s tasks (Williams v British Airways plc [2011] IRLR 948).

The WTD is implemented in the UK by the WTR, under which workers are entitled to 5.6 weeks’ annual leave. Such holiday is paid in line with the rules on calculating a “week’s pay” in the Employment Rights Act 1996 (ERA). Under those rules, workers like Mr Lock who earn a basic salary plus commission are entitled to holiday pay based on their basic salary alone.

The tribunal hearing Mr Lock’s case decided it should make a reference to the ECJ for a definitive ruling on the EU law position applicable to the circumstances of his case. The UK government intervened to support British Gas’ view that, as Mr Lock received not only basic pay but commission that fell due while on annual leave, there had been no breach of the WTD.

What has the ECJ said?

Applying the principle of “normal remuneration”, the ECJ decided that Mr Lock’s sales commission was directly and intrinsically linked to the performance of the tasks required under his contract of employment as a salesman. Accordingly, under the WTD, the commission must be taken into account in calculating his statutory holiday pay.

The ECJ noted that Mr Lock did receive commission while on annual leave and that the financial disadvantage occurred as a result of his inability to generate commission during his holiday period, which did not take effect until some weeks afterwards. Nonetheless, the ECJ considered this was contrary to the WTD’s objectives because the worker might be deterred from exercising the right to annual leave.

The ECJ also said that the method for calculating pay during annual leave to take into account commission must be left for national courts and tribunals to determine in line with ECJ case law and the WTD.

Mr Lock’s case will now go back to the employment tribunal, which will have to consider whether national law - as set out in the WTR and the ERA “week’s pay” provisions - can be interpreted in line with the ECJ’s ruling.

How should employers respond?

Clearly, the ECJ’s ruling may have a major financial impact on employers who pay commission to their salespeople. They may end up having to change the way they calculate holiday pay for such workers to include commission and could face retrospective claims relating to previous periods of annual leave.

One limiting factor is that the ECJ’s ruling would only apply to the four-week annual leave entitlement under the WTD and not the additional 1.6 weeks provided by the WTR. Moreover, it should not affect contractual holiday pay over and above the statutory minimum.

That aside, we suggest it is premature for employers to be changing their holiday pay arrangements or entering into negotiations about backdated compensation for employees. It is not clear how the tribunals will interpret the ECJ decision – in Mr Lock’s case and perhaps other cases - and it is likely to be the subject of further appeals to the higher courts. Employers should keep a close watching brief on further developments. Some may wish to seek legal advice at this stage to understand the potential risks and financial exposure and any options available. 

This is particularly so in light of the complicating factor that Mr Lock’s claim doesn’t directly concern his holiday pay, which did include commission. Rather, it focuses on the fact that his remuneration was subsequently affected by his inability to generate commission while on leave. It remains to be seen how the tribunal will wrestle with this issue and how far it will feel able to interpret the “week’s pay” rules to award Mr Lock additional compensation.

One potential outcome is that the average amount of commission received by a worker will in future have to be determined over a reference period in order to determine holiday pay. The ECJ’s Advocate General, who gave a preliminary opinion in Mr Lock’s case, suggested a 12-month reference period might be appropriate. However, in a section of the ERA “week’s pay” rules which does not apply to Mr Lock, a 12-week reference period is used – so that may be a more natural fit with national law.

This underlines that it is far too speculative at the present time to determine what specific changes to holiday pay arrangements might ultimately be required to comply with the ECJ’s ruling.

Much the same applies to the separate but related issue of whether overtime payments should be included in the calculation of holiday pay, as explained in our previous Journal article. The position in relation to overtime is due to be explored in two cases listed for hearing by the Employment Appeal Tribunal in July. There is a possibility those cases could also be referred to the ECJ as well, so it doesn’t appear likely that the questions hovering over calculation of holiday pay will be conclusively resolved anytime soon.