Should holiday pay include lost commission?

The forthcoming appeal by British Gas against an employment tribunal decision will set a precedent for big workforces

Should holiday pay include lost commissionEmployers will learn in the coming weeks whether they are required to pay employees during annual leave for commission that they would have earned had they been at work.This counterintuitive proposition has been put forward in an employment tribunal claim against British Gas concerning about 1,000 of its sales employees. If successful, the case could significantly increase wage bills for employers, particularly those with large sales workforces.

The claim comes after a series of recent cases where employees have successfully argued that they are entitled to payment of overtime during annual leave, which have also had a big impact for employers. All the cases relate to the UK’s implementation of the EU Working Time Directive.

In the British Gas case, the employees argue that taking annual leave means that they cannot generate sales for British Gas, so their commission is lower on their return from holiday than if they had worked. They claim this is a disincentive against taking annual leave and that holiday pay should therefore include a sum representing the commission that they would have earned if they had been at work.

The case has already been heard in the lower employment tribunal and was then referred to the European Court of Justice (ECJ) for guidance on the interpretation of the Working Time Directive. The ECJ held that the EU’s Working Time Directive requires commission to be included when calculating holiday pay (because employees must receive their “normal remuneration” when on holiday and commission constitutes “normal remuneration” because it is “intrinsically linked to the performance of tasks under the worker’s contract”).

When the matter was referred back to the employment tribunal for a decision on the facts, the tribunal held that wording should be read into the English legislation to give effect to the EU Directive and the ECJ’s judgement.

British Gas has appealed against the employment tribunal’s decision. British Gas argues that the employment tribunal had no right to read words into the English legislation and the tribunal should not go against the legislature’s intention. In addition, it argues that commission is not comparable to overtime, so the case should be distinguished from the previous cases regarding overtime and holiday pay.

If British Gas wins the appeal, it is likely to be a pyrrhic victory for employers, as the government will ultimately need to amend the English legislation so that it properly implements the EU Working Time Directive and makes it clear that commission must be included.

This change would only be effective from the date of any new legislation, so employers are likely to avoid large claims for back pay but it would obviously involve significant cost going forwards.

If British Gas loses the appeal, commission will need to be included in holiday pay and claims for back pay are possible, but many questions remain about the practicalities of calculating this, which will no doubt lead to further claims.

Kathryn Dooks is a partner at Kemp Little