Court of Appeal upholds inclusion of commission in holiday pay

The Court of Appeal has upheld an Employment Appeal Tribunal (EAT) decision, which ruled that normal remuneration earned over a suitable reference period should be taken into account when determining holiday pay.

In the case of Lock v British Gas, Mr Lock, a salesman, claimed at an employment tribunal that British Gas owed him money on the basis that his holiday pay did not reflect any commission that he would have earned had he been working.

The European Court of Justice (ECJ) ruled at the time that since Mr Lock’s commission was directly linked to the work he carried out, it should be taken into account when calculating holiday pay. The case then returned to the Employment Tribunal for the ECJ ruling to be applied in UK law.

This month’s Court of Appeal’s decision is important to any employer who runs a commission scheme or regularly makes other payments in addition to basic salary that are intrinsic to the job, for example overtime or stand-by payments.

Following the decision, employers will now be required to include commission payments in holiday remuneration and this could have severe financial implications. As such, despite the potential for an appeal, now would be a good time for employers to put the necessary measures in place and open lines of communication with beneficiaries.

However, according to lawyers, the biggest unanswered question following this latest decision remains the appropriate reference period for averaging the commission.

While some commentators have suggested 12 weeks, employers should make their own decision based on their commission scheme and the industry in which they operate.