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Making Money on Holiday: Should Commission be Included?

Posted on Oct 23, 2014 by Hayley Anderson  | Tags: employment law, employer liability, employee rights, commission payments, HR  | 0 Comments

‘Surely not’ is the response likely to be received from most employers. However, according to the recent European Court of Justice (ECJ) decision in Lock v British Gas Trading Ltd, commission payments should be taken into account when calculating holiday pay. 
The employee in this case was an Energy Sales Consultant, responsible for selling energy products on behalf of his employer, British Gas. Lock received a basic salary but also received commission in respect of sales made. The amount received in commission varied each month but always made up a significant part of his earnings – often around 60%. His earnings were paid in arrears so would not drop whilst he was on holiday but as he was not making any sales during this period, there would be a significant drop in earnings in the months that followed. 
Lock brought a claim in the Leicester Employment Tribunal against his employer, arguing that his holiday pay should include commission payments. The tribunal then referred the case to the ECJ to establish whether there was a duty upon member states to take into account commission payments when calculating holiday pay and, if so, how holiday payments should be calculated to take the commission element into account. It was held that the effect of disregarding the commission element of pay for a worker who regularly receives commission as part of his overall earnings would be to discourage that person from taking annual leave, which would in turn be contrary to the intentions of the Working Time Directive. The purpose of the legislation is to ensure that the worker is in a similar pay position to that which they would enjoy whilst at work and therefore holiday pay should include any sum which is ‘intrinsically linked’ to the performance of the individual’s contract. In Lock, the ECJ also directed that the commission element should be averaged out over a specified reference period in order to determine a fair amount to be paid alongside basic salary. However, the calculation of that reference period was referred back to the Leicester Employment Tribunal to be determined. It was suggested by the ECJ that a 12 month reference period may be appropriate, however, this may not sit well with existing UK legislation as the existing relevant period for calculating a worker’s average hours where their hours are irregular is 12 weeks. So, it is possible that the UK courts could choose either of these periods, somewhere in between or something totally different. 
The decision in Lock followed that of Williams v British Airways which considered the calculation of annual leave payments due to pilots. In Williams, it was held that the amount paid to a worker should reflect ‘normal remuneration’. There are also currently a number of other cases making their way through the court system, and judges have been tasked with determining whether overtime and other bonus payments should also be included in holiday pay calculations. The outcome in these cases is still awaited.
So what should you do? 
If you are an employer and pay workers on a commission basis, you may want to change your approach to holiday pay calculations now if commission is not currently taken into account. You may also want to consider settling any backdated claims from employees should any be made. However, as we do not yet have confirmation as to the correct referencing period, a safer approach may be to sit tight and await the decision from the Employment Tribunal in Lock to ensure that any calculations and remedy payments are correct. If you think that the ECJ decision could result in potentially costly consequences for your business, you may want to consider obtaining legal advice on how to best prepare for and/or settle any claims and change holiday pay systems going forward. 
If you are an employee and regularly receive commission payments as part of your earnings, you may be able to claim for backdated earnings and increased holiday payments going forward. However, as above, employers may be waiting for further confirmation as to how such payments should be determined before any changes or settlement payments are offered. 
For more information on holiday pay calculations, or how to claim, please get in touch. We would also welcome any comments or views on how you or your business might be affected.
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