Should Holiday Pay Calculation Include Sales-related Commission in Addition to Basic Pay?

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Yes, was the view of the European Court of Justice (ECJ) in Lock v British Gas Trading Limited last week. This decision is consistent with the earlier opinion of the Advocate General in the same case which was given on 5 December 2013. Employees should not be deterred from taking annual leave and they might be if their income would be lower because of a period of annual leave taken when they would be unable to generate commission, albeit that the actual reduction in earnings would not occur until after the annual leave.

The case concerned an individual, Mr. Lock, who received a basic salary but earned commission on top which was variable depending on sales achieved and not on time worked. The commission element made up, on average, 60% of his monthly earnings. As he could not earn commission whilst on leave his income would be lower if he took leave. Having issued his claim for holiday pay, the employment tribunal referred it to the ECJ, specifically to question whether the holiday pay should include commission payments that the worker would have earned had they not taken the leave, and, if so, how that commission element of holiday pay should be calculated.

In its press release (No.76/ 14), the ECJ points out that, during annual leave, a worker must receive his normal remuneration and that the purpose of holiday pay is to ensure that periods of rest are comparable in salary to periods of work. The ECJ rejected the argument of British Gas that Mr. Lock received his salary and commission earned from previous weeks’ work during his annual leave. The main basis for the decision appears to be that a worker may be deterred from exercising their right to annual leave. This would be contrary to the objective of the Working Time Directive.

This case followed the ECJ’s decision in the case of Williams and others v British Airways plc (C-155/10) that the holiday pay of a worker whose pay is made up of sales-related commission as well as basic salary should receive holiday pay which is comprised of both their basic salary and an amount that reflects the commission, or other regular variable component, previously earned over a representative period.

However, in the Lock case, whilst the ECJ confirmed that commission should be included in the calculation of holiday pay it left it to the national courts to determine the method of calculation of commission, although this should be determined in accordance with the objective of the Working Time Directive, to ensure that workers take paid leave. The holiday pay must, in principle, be determined in such a way as to correspond to normal remuneration received by a worker, which might require “specific analysis”.

The Advocate General, in his earlier opinion on the Lock case, suggested a representative period of 12 months. This is considerably more than the 12 week reference period for calculating average week’s pay currently contained within the Employment Rights Act which is used to calculate holiday where weekly earnings are variable. It also means that an employee whose pay is made up mostly of variable commission may actually earn more when taking a period of leave, in order to make up for the inability to do commission-earning work whilst taking leave which would result in lower commission paid after taking leave.

Employers with staff earning commission will need to review their contractual documents and processes for holiday pay calculations, in order to consider how best to approach the calculation of the commission element of holiday pay.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact Clare Gilroy-Scott or call 020 7404 0606.