Commission decision hits holiday pay sums for employers

As the big summer break gets underway, commission-based employees can expect fatter pay packets on their return following European Court ruling

Sales staff heading for the sun will have a rosier return in future, following a ruling by the European Court that commission payments be considered when calculating holiday pay.

The Court has said that commission-based employees could be put off taking leave if they are worse off when they take a holiday, and that undermines the intention of the EU Working Time Directive. The directive is implemented in the UK through the Working Time Regulations 1998, under which workers have the right to 5.6 weeks of paid annual leave at the statutory rate of a week’s pay for each week of leave.

The simple meaning of a week’s pay is the normal remuneration that a worker could expect to earn in a week, and if that varies, then it is calculated by working out the average over the previous 12 weeks. But for employers, the calculation has become increasingly difficult to work out. Earlier rulings had opened the door to compulsory and voluntary overtime payments being taken into account, and following this judgement, it just got even more complicated.

The latest case centres on an employee of British Gas. Mr Lock was a sales consultant with around 60% of his total pay being based on successful sales. When he took two weeks’ paid annual leave at the end of December 2011, he was paid commission for previous sales that fell due during the holiday period, but then suffered in the months that followed and he made an Employment Tribunal claim based on lost holiday pay.

The tribunal referred the case to the European Court of Justice (ECJ) for a preliminary ruling on whether member states like the UK should be taking commission payments into account and if so, how that might be calculated. The ECJ said that Lock, and anyone else heavily dependent on commission, would suffer a financial disadvantage in the form of less remuneration after a holiday and this would discourage them from exercising their right to annual leave, which was not the intention of the legislation.

Whether or not normal remuneration during a period of annual leave should include allowances on top of basic salary has been considered before, in the 2011 case of Williams v British Airways, which ruled that any element of pay that is intrinsically linked to the performance of the tasks that the worker is required to carry out should be included. A specified number of guaranteed contractual overtime hours, for example, should be included in the calculation of normal remuneration.

The happy outcome for Mr Lock means that in future, employers will need to factor commission into any calculation of holiday pay where the commission is permanent enough to be regarded as forming a normal part of someone’s monthly pay and there is an intrinsic link with the performance of tasks they are required to do.

Said Mark Cornish law expert at Grant Saw Solicitors : “The calculation of holiday pay is often more complex than people think, and this case makes it even more so.  The decision lacks clarity on how the holiday pay should be calculated in these circumstances, saying it was up to the national courts of the member states. So UK legislation is likely.

“In the meantime, a form of averaging of commission over a previous period could be used, but it’s not just about how much should be paid during a holiday, it’s also about making sure that employees are not financially worse off in the period following.  Employers may want to think about reviewing their commission structure to see which elements are going to be relevant for inclusion.

He added: “There’s been talk of employees taking strategic holidays, after a particularly lucrative period of commissions. That seems exaggerated, but it all needs taking into account.”

Lock v British Gas Trading Ltd [2014] EUECJ C-539/12: http://www.bailii.org/eu/cases/EUECJ/2014/C53912.html

Williams v British Airways [2011] : http://www.bailii.org/eu/cases/EUECJ/2011/C15510.html

Working Time Regulations 1998 : http://www.legislation.gov.uk/uksi/1998/1833/contents/made

This is not legal advice; it is intended to provide information of general interest about current legal issues.