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British Gas Trading v Lock, EAT

Last week, the Employment Appeal Tribunal (EAT) handed down its judgment in the employer’s appeal against the Employment Tribunal judgment in the case of Lock v British Gas Trading Ltd. Disappointingly, the appeal decision is noteworthy more for its review of the rules relating to binding judicial precedence (i.e. the extent to which a court of law can depart from the reasoning in the judgment of another senior court in a similar case) than it is in providing practical guidance to the correct calculation of holiday pay.

A question I am often asked by employer clients is how to calculate holiday pay in respect of employees whose weekly pay fluctuates according to (a) the amount of overtime they have worked in a particular week and (b) commission payments.

The hardline view (what I call the Victorian Mill-Owner approach) is that employees should receive only basic pay during periods of annual leave, given that they are ‘resting’ and hence not around to provide the extra assistance required to qualify for the additional payments. However, one thing is clear: the Victorian Mill-Owner view does not comply with either domestic or European legislation. Holiday pay must take into account the fact that the employee normally receives overtime payments and, following the Employment Tribunal’s decision in Lock v British Gas Trading (2015), payments of commission.

However, there would appear to be a fundamental difference between these two sources of additional pay. Overtime, on the one hand can properly be regarded as pay for work done, regardless of results achieved. Usually, overtime is paid to those whose salary is calculated in terms of hours actually spent working at the employer’s place of work. It is generally, though not exclusively, operatives who form the junior ranks of an organisation who are paid in this way and hence, it seems fair to argue that these workers ought not to suffer a sudden cut in their short-term standard of living purely because they are exercising their right to paid annual leave. Commission, however, is a very different matter. The whole purpose of paying commission is to provide an incentive for the worker to achieve a desired result – usually, the closure of a contract with a customer. As such, commission payments (in the true sense of the term) are not dependent upon the number of hours worked. Hence, an employee might spend many hours to conclude one contract whereas he or she closes another almost without effort. The latter would be regarded as an ‘easy win’. Including commission in the calculation of holiday pay seems, therefore, much harder to justify, especially where there is no real pattern or regularity.

The EAT judgment simply affirms last year’s employment tribunal decision which is that commission should be included. British Gas has indicated its intention to appeal the decision further to the Court of Appeal but unless and until it does so, we are left in a continuing state of confusion and uncertainty as regards the correct calculation in practice. For the time being, employers would be well advised to decide upon a pay reference period (at least the 12 weeks preceding the date upon which the holiday period is to commence) and include within the calculation all payments made to the employee during that reference period, regardless of the basis for the payment (i.e. time served or results achieved).