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What's New? > Commission decision hits holiday pay sums for employers

Commission decision hits holiday pay sums for employers

Published: 22nd July 2014

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 employment law expert Sally Dean of Ward Gethin Archer Solicitors:  "The calculation of holiday pay has become a minefield and it just got even tougher.  The ECJ hasn't clarified how the holiday pay should be calculated in these circumstances, saying it was up to the national courts of the member states but it is likely that UK legislation will be amended to reflect this ruling.  

"In the meantime, a form of averaging of commission over a previous period could be used, but itís not just about how much should be paid during a holiday, itís 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.  Now is the right time to get this structure updated and to be clear on how it's affected by the ruling. 

Sally added:  "There's been talk of employees taking strategic holidays, after a particularly lucrative period for example, and it all needs taking into account."

If you require further information on the above issue or any other employment matter, please contact a member of our Employment Law team at your nearest office by clicking here.

This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek our specific advice.