Do you Pay Commission? If so, read on…

Regular readers of our blogs may recall back in January 2015 we highlighted the case of Lock v. British Gas which concerned how much a worker should be paid when they take holiday. Mr Lock was a sales consultant for British Gas who was paid a basic salary plus sales commission on a monthly basis. That commission obviously fluctuated depending on his sales but in general the commission made up about 60% of his wages. When he went on holiday however, he was only paid his basic salary. He brought a claim asserting that his holiday pay should be calculated using his basic pay plus what he would have earned from commission had he not been on holiday.

The question was referred to the European Court which determined that Mr Lock’s holiday pay should include a sum to reflect the fact that he effectively lost commission by taking holiday. No guidance was given on how that lost commission should be calculated and the case was remitted back to the Employment Tribunal in the UK. The Employment Tribunal on reconsidering the matter in the light of the European Court Judgment, confirmed that Mr Lock’s holiday pay should be calculated by reference to basic salary plus lost commission. The Tribunal stated that the calculation should be done on the basis that Mr Lock, who worked regular hours, should be treated as a “piece worker” for the purposes of calculating holiday pay. This meant his holiday pay would be calculated on the basis of an average hourly rate of pay including basic salary and commission over the previous 12 week reference period.

British Gas appealed that decision to the Employment Appeal Tribunal on the narrow issue of whether or not it was possible to interpret the UK domestic legislation (The Employment Rights Act 1996 and The Working Time Regulations 1998) to give effect to the European Court’s finding.  In a decision handed down on 22 February 2016 the EAT has dismissed that appeal.

In summary therefore, the current position is that in principle an employee who is paid a basic salary plus results-based commission should be paid for any holiday not only their basic salary but something in relation to the commission that they have not been able to generate (and therefore have lost) by virtue of being on holiday.

Unfortunately, this leaves us with many unanswered questions including the following:

1. As things currently stand, for calculating the amount of commission ‘lost’ over a holiday period, an employer should look at average commission earned over the previous 12 week reference period. That reference period however, may not properly reflect what the employee would normally earn in commission which may vary hugely over the year depending on seasonal peaks and troughs within the particular industry;
2. Mr Lock was paid commission on a monthly basis on sales he made. This begs the question whether or not the position is different for commission which is paid only over a certain target of sales where that target is set having taken into account the fact that the employee will be off for some period of time during the year on holiday;
3. The position may also be inherently different for commission schemes where the employee genuinely does not miss out on earning commission by virtue of being on holiday. There may, for example, be a distinction between a shop worker whose commission depends on them being on the shop floor and helping customers in respect of any specific sale and companies with large multi-million pound contracts which can take many months to secure. Taking the latter example, it is more likely that the sales person still receives the commission on the sale or the contract, even if they are on holiday when ultimately the order is placed.

If you have any specific questions about how this decision could effect the commission structure within your own firm, please don’t hesitate to contact Linky Trott – Partner or any member of the Edwin Coe Employment Team.

If you aren’t receiving our legal updates directly to your mailbox, please sign up now