10 October 2016

Commission and holiday pay: Court of Appeal uphold EAT decision

This article was written by Tamsin Rickard, Professional Support Lawyer

We have reported previously on the series of holiday pay claims that have dramatically changed the law on what workers must receive during annual leave. A key shaping factor in the change has been the decision in Lock v British Gas, both in the ECJ and in the Employment Tribunal ('ET') decision, which determined that employers must include commission and other types of variable pay in holiday pay calculations. The reasoning was that such payments were paid with sufficient regularity for them to form part of the worker's normal remuneration, and that failure to pay these during holiday time would place the worker at a financial disadvantage (and therefore potentially discourage them from taking holiday).

However, nothing in the Working Time Regulations 1998 (“WTR”) as originally enacted requires that commission should be included in holiday pay. On the face of it, the WTR is thus out of step with EU law. The Employment Tribunal and the EAT in Lock both found a way round this by "reading into" the WTR extra wording requiring that commission should be included in holiday pay calculations under the WTR. This was appealed on the basis that this runs counter to the clear wording of the legislation, and arguably isn't permissible on the basis of judicial interpretation.

The litigation has now reached the Court of Appeal which has upheld the rulings of the EAT and ET that the WTR can be read in this way.

It’s important to note that the appeal was not a challenge to the original ECJ decision, but rather to the finding that the WTR could be read flexibly, so as to require employers to include commission in holiday pay. If the appeal had failed, the government would have needed to legislate to correct the position. So what was at stake here, if the end result would be the same? If it was necessary to introduce new legislation then any changes will only take effect going forward from the date the change was made. Whereas, as the Court of Appeal confirmed that the case could be decided on a reinterpretation of the current law, this means the case merely clarifies what the law always said (although clearly this is something of a legal fiction!). Or to put it another way, new law would mean no back pay claims for commission errors. And (although this is pure speculation), perhaps in light of the Brexit vote, any new law might have been kicked into the long grass pending the UK’s formal exit from the EU, and hence never implemented.

What does this mean for employers?

In short, this ruling means that employers who pay commission to their staff but who don’t reflect it in holiday pay calculations are at risk of a claim.

Unfortunately, uncertainty remains for employers. The Court of Appeal judge expressly ruled out addressing the potentially wider implications for employers whose remuneration packages go beyond basic salary. In fact, he went further and made clear the ruling applied only to "results-based commission” and not commission or other payments more generally. As a result, employers face uncertainty as to the scope and calculation of sums that should be included in holiday pay, both in terms of paying staff on an ongoing basis and also in quantifying potential historic liabilities for back pay. There is one silver lining, as readers may recall; back pay claims brought now are subject to legislation limiting the period for which these kinds of losses can be claimed.

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