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Commission should be included in "Normal Remuneration" for the purposes of Holiday Pay

The recent decision in Lock v British Gas Trading Ltd C539-12 has confirmed that holiday pay should include commission for those who receive regular commission as part of their remuneration.

Mr Lock, a sales executive, brought a claim against British Gas Trading Ltd for unlawful deduction from wages on the basis that although he received commission that he had previously earned, and which fell due to be paid during annual leave, he lost the opportunity to earn commission during the time that he was on annual leave and, as such, subsequent remuneration did not include any commission for this period. Mr Lock's salary was made up of approximately 60% commission, and this therefore represented a significant financial loss.

The Employment Tribunal referred the case for the consideration of the European Court of Justice ("ECJ"). The ECJ held that where an employee's pay is made up of a basic salary and regular commission, that employee's holiday pay should include representative commission averaged out over a representative period. The ECJ commented that the practice to only include basic pay in the holiday pay of these employees meant that they were disincentivised from taking annual leave contrary to the purpose of the Working Time Regulations; it was a fundamental principle that employees should not be disadvantaged for exercising their right to take annual leave.

The implications of this decision are far reaching for employers in the United Kingdom, many of whom have commission-based pay structures to incentivise their employees. In light of this decision employers will need to review their payment schemes and commission arrangements, preferably prior to the summer holiday season, and may face claims for backdated holiday pay from employees.

We wait to see whether the decision in Lock will be extended to include overtime pay when Neal v Freightliner Ltd ET/1315342/12 is heard by the Employment Appeals Tribunal at the end of July. This is a claim for unlawful deduction from wages based on the argument that where an employee works regular overtime, this too should be averaged out and included in holiday pay. Given the principles set out in Lock, it seems probable that shortly employers will also be obliged to include any pay in respect of regular overtime in holiday pay.