It’s been four years of waiting but on the 7th October the Court of Appeal finally gave its decision in the long running holiday pay case of British Gas v Lock. The question now is what that actually means for recruitment companies and their commission structures. There are still questions to be asked as to practicalities of the judgment but it does show up a future direction that recruiters can be planning for now.
In its decision the Court of Appeal apparently confirmed that EU leave, i.e. the four weeks’ leave derived from the Working Time Regulations 1998 (“the WTR”), should include a sum in respect of contractual “results-based commission” where it forms part of a worker’s normal remuneration. That means this decision does not apply to any leave that a consultant takes in excess of the statutory 20 days, or bank holidays.
Any recruitment company director hoping for some useful practical guidance on how commission should actually be taken into account for calculating consultants’ holiday pay will be disappointed. The Court of Appeal only dealt with the narrow issue of whether UK legislation can be interpreted in such a way as to give effect to EU law requirements regarding the calculation of holiday pay, not how to actually calculate it.
However, now that a decision has been handed down, and unless it is appealed again to the Supreme Court, we will have to think about how we address this in reality. The Court clarified that this decision relates to results based commission schemes, not bonus payments or payments triggered by an employee hitting commission thresholds. But that was about as far as it went. I suspect that unless an appeal to the Supreme Court deals with it, we will have to await future Employment Tribunal (“ET”) claims to determine the practicalities.
The original ET in this case amended the WTR to enable holiday pay to be calculated under existing provisions over a 12 week reference period. The Court of Appeal criticised this new provision on the basis it was too wide and didn’t just apply to results-based commission. That is why the Court of Appeal narrowed the commission to results-based. And although it didn’t expressly attack the 12 week reference period, the Court of Appeal said it was saying nothing about what in any particular case was the appropriate reference period.
What’s important to be aware of is that it isn’t just what are recruitment companies going to do about results-based commission structures going forward; there is also the potential for consultants to recover past underpayments of holiday pay. Similar to Mr Lock, consultants could bring claims for the unlawful deduction from wages. Consultants would have to bring their claim within three months of the alleged underpayment, and any break of three months between payments/holidays could break the chain. Also, there is now a two-year cap on claims for backdated holiday pay. So whilst the focus for recruitment companies is how to manage the increased cost going forward, provision may have to be made for any backdated claims.
I don’t think Brexit will drastically alter the position either. Although the WTR are a direct application of EU Law, the Prime Minister has made it very clear that under her government there will be no erosion of the workers’ rights that this law governs. Even if the government did make a U turn on the WTR after Brexit, that will be a long time coming, so this case will continue to set the scene.
There is a general consensus that recruitment companies needn’t rush to alter their commission structures. After all, no one knows yet how to interpret the effect of the right for consultants to receive holiday pay that reflects their commission. It’s still very much a case of watch and wait. But maybe, somewhere in the back of your mind, it might be worth thinking about how you much re-structure things. Here are a few of the possibilities that have been running around my head:
- calculate the average commission over 12 weeks not 12 months, and top up holiday leave on an individual basis based on the average commission earned over the last 12 weeks;
- reduce the level of commission paid, to offset the increased cost of paying it with holiday pay;
- reduce the percentage of commission earned and increase salaries;
- leave basic salaries as they are, and pay commission over 12 months with %age uplift for holiday leave;
- leave salaries as they are and pay commission annually.
No one has the answers yet, let alone me, but it’s worth bearing in mind for the future.