May 23, 2014

Holiday pay should include commission

Are your workers paid by reference to basic salary and commission or other variable pay? If so, you are now advised to review how you calculate your workers' holiday pay in view of a ruling handed down this week by the European Court of Justice which decided that a worker's statutory holiday pay should not be limited to basic salary where commission is part of their remuneration (Lock v British Gas Trading Limited).

What happened in this case?

Mr Lock was employed by British Gas as an internal energy sales consultant. He was paid a fixed basic salary together with a variable commission calculated by reference to sales achieved, rather than the time worked. His commission made up approximately 60% of his total remuneration and was paid in arrears, several weeks or months after a sale. He took annual leave over the Christmas period in December 2011 and was paid his basic salary plus the commission from previous sales that fell due during the period. However, as he was unable to earn commission during his annual leave, his salary payments over the coming months suffered a reduction because he was unable to generate commission over the Christmas period. He brought a claim in the Employment Tribunal for lost holiday pay.

The European Working Time Directive gives workers the right to paid annual leave but does not specify how holiday pay should be calculated.  In the UK, these rules are laid down in the Working Time Regulations.

The Employment Tribunal decided to ask the European Court (ECJ) whether the Directive requires Member States (such as the UK) to take measures to ensure that a worker taking leave is paid by reference to commission payments that the worker would have earned if at work, and, if so, how to work out that holiday pay.

The ECJ said that although Mr Lock received payment for his holiday which took into account the commission earned in the period preceding his annual leave, he may be discouraged from exercising his right to annual leave, given the financial disadvantage which, although deferred, is nonetheless genuinely suffered by him during the period following his leave. Therefore, a worker in Mr Lock's position should be entitled to statutory holiday pay which takes into account commission payments that the worker would have earned if at work.

As regards the calculation of that holiday pay, the ECJ said this was a matter for the national courts to decide on the basis of the rules and criteria set out in the European case law on paid leave.

What this case means for employers?

This case reiterates the principle decided in the previous holiday pay case of Williams v British Airways that remuneration paid in respect of annual leave should be the "normal remuneration" received by the worker; this means that it must include any elements of pay which are "intrinsic to the performance of the tasks which the worker is required to carry out under his contract of employment".  In Williams, this meant that payments for time spent flying should be included, but payments to cover costs connected with time spent away from base, which were occasional or ancillary costs, were not. The general principle behind this is that the worker must not be put off taking leave by financial considerations.

The case takes this principle a step further by making it clear that where a worker regularly earns commission or another variable element of remuneration which is intrinsically linked to their role, their holiday pay should take this into account. However, the ECJ unfortunately did not specify precisely how this should be done.  It may be that there will be an amendment to the Working Time Regulations in due course to take account of this ruling which will hopefully specify how this might be calculated.

In the meantime, clients are advised that they should review the way in which they calculate holiday pay and consider how best to factor in to holiday pay, any commission or other relevant variable payments normally paid to the worker.  It will also be necessary to ensure that the holiday pay compensates for the fact that they are unable to earn commission during leave and we would suggest that some form of averaging of commission is the best way to do this.

Finally, clients should be aware of the appeals in Neal v Freightliner and Fulton v Bear Scotland, due to be heard by the Employment Appeal Tribunal (EAT) at the end of July this year.  This time, the EAT will be considering whether regular overtime payments should be factored into the calculation of holiday pay.  Concerns now also arise in relation to whether cases like these will lead to questions over whether annual bonuses should be taken into account when calculating holiday pay.

All of these cases are significant as they could expose employers to large claims for back-pay on the basis that holiday pay has been wrongly calculated.

If you would like further information on any issue raised in this update please contact Adam Lambert or Ruth Bonino.