Commission can be included in holiday pay calculations | KPMG | UK

Commission can be included in holiday pay calculations

Commission can be included in holiday pay calculations

The Employment Appeals Tribunal decision in the Lock v British Gas case has been published.


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The Employment Appeals Tribunal’s (EAT’s) recent decision in the Lock v British Gas case is important, as it reinforces the European principle that holiday pay should reflect the income a worker would usually receive, had they been working. It provides binding authority that commission should be included in the calculation of holiday pay for the four weeks' EU annual leave.  However, whilst the case appears to give employers certainty that commission should be included in holiday pay calculations, this is unlikely to be the end of the story.

Key points

Mr Lock was a salesman for British Gas who was paid basic salary plus a results-based commission (based on the outcome of his efforts, not the amount of work done).  The point at issue in the case is whether or not this commission should be included in calculating his holiday pay.

The EAT has dismissed British Gas' appeal against the earlier decision of the Employment Tribunal in favour of Mr Lock, and has established the following principles:

  1. There is no dispute over how holiday pay should be calculated from a European perspective. The right to paid leave is a pillar of EU social law from which there can be no derogation. Remuneration must be maintained during periods of annual leave, and workers must receive their normal remuneration during that time. If a worker receives basic salary and commission, national legislation should not permit holiday pay to be calculated by reference to basic salary only. The wide ranging nature of the judgement means that a distinction between commission which is results-based and that which relates to the amount of work done is irrelevant.
  2. It is permissible and necessary to imply words into our domestic legislation to comply with EU law.  Parliament's intention must have been to comply with EU law and therefore the Working Time Regulations 1998 (WTR) should be interpreted in line with European principles. The WTR were specifically made to implement the Working Time Directive. Therefore, adopting a confirming interpretation respects the intention of Parliament.
  3. The decision in Bear Scotland v Fulton is correct. British Gas had sought to persuade the EAT that it should depart from the decision in Bear Scotland v Fulton but the EAT held that such a departure could not be justified. There was no reason to distinguish a case concerning non-guaranteed overtime from one concerning results-based commission.

Remaining uncertainties

Reference period

We still have no clarity on what the appropriate reference period should be for calculating holiday pay for workers who earn commission. We may get some steer from the Employment Tribunal when it decides how Mr Lock should be compensated for his underpaid holiday. However, this will not be binding and so employers may take different approaches until we get clear authority.

Potential for appeal

Given that British Gas has nearly a thousand claims which hinge on this decision, it is very possible it will seek leave to appeal to the Court of Appeal. 

What should employers do now?

If employers are not yet including commission in holiday pay calculations, a 12 week reference period may be a good starting point since this applies more generally to many holiday pay calculations. However, employers need to be prepared to keep this under review and if necessary, revise the calculations in line with further legal developments.

For further information please contact:

Donna Sharp

Dorothee Giret

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