As the holiday season approaches, employers will have to grapple with the many legal issues surrounding annual leave and holiday pay. The latest of these issues to come to the fore is whether or not employees should be paid holiday pay which includes commission.
A recent ruling of the European Court of Justice (ECJ), relating to Lock v British Gas Trading Limited, has held that in some circumstances holiday pay should include commission, otherwise workers may be deterred from taking holidays. In this case Mr Lock’s remuneration was made up of basic pay and commission, the latter being the lion’s share of his pay. During his holidays in December 2011/January 2012, he was paid basic pay and commission for sales which fell due during the holiday period. However, in the months afterwards he was financially disadvantaged because he had, naturally, been unable to generate any commission from sales during his annual leave. Mr Lock then made a claim to the Employment Tribunal in respect of lost holiday pay. The Tribunal decided to refer a question to the ECJ for a preliminary ruling on whether the UK and other EU member states have to pay holiday pay which includes an amount in compensation for the amount of commission a worker would have made had they not been on holiday and, if so, how to calculate this.
The ECJ’s view was that since a worker in Mr Lock’s position would suffer financially in the months following a period of holiday he would be deterred from taking a holiday in the first place, which is contrary to the purpose of the legislation (Working Time Directive 2003/88/EC). It was noted by the Court that where a worker’s remuneration has several components, the holiday pay payment has to be scrutinised to establish how much should actually be paid by way of holiday pay. The Court held that where a worker’s remuneration includes contractual commission, determined with reference to sales achieved, the Directive precludes a national law which calculates statutory holiday pay based on basic salary alone. In relation to Mr Lock, although the amount of the commission he earned varied from month to month, it was a permanent enough feature of his remuneration for it to be treated as a normal part of his salary: it therefore had to be taken account of when the employer was calculating holiday pay. The ECJ, however, stopped short of ruling on how holiday pay including commission should be calculated, and said that it was up to the National Courts of the member states to decide on this, based on the rules already set out in case law and the Directive.
In respect of the Lock case the ECJ has followed the principle decided in the case of Williams v British Airways in which it was decided that remuneration paid in respect of annual leave should be the “normal remuneration” received by the worker.
As a result of the ECJ’s ruling in respect of the Lock case it is likely that domestic UK legislation will be amended to include a formula for calculating holiday pay where workers are paid commission for actual work carried out. It may be that some form of averaging formula (to even out the previous month’s commission) is established. However, it is likely to be some time before this amendment is made. In the meantime, employers would be wise to review their Holiday and/or Commission policies to establish which additional payments made to workers should be included in their holiday pay and whether the way in which their commission scheme works needs to be changed in order to comply with the ECJ ruling.
If you would like advice on holiday pay or any aspect of employment law or HR, please do get in touch.