Holiday pay should include commission payments

Should holiday pay include commission? Yes, if that commission is related to the number of sales the employee makes when they’re at work.

Current legislation

The European Working Time Directive (Directive) gives workers the right to paid annual leave but does not specify how holiday pay should be calculated. In the UK, most workers have a right to 5.6 weeks paid annual leave under The Working Time Regulations.

It had previously been thought that where a worker received a basic salary and commission payments as part of their remuneration, only the basic salary had to be paid to the worker during any period of annual leave. However, the recent case of Lock v British Gas Trading Limited held that commission payments should be taken into account when calculating the salary to be paid during holiday.

Brief facts of Lock

Mr Lock was a sales consultant for British Gas receiving a basic salary and commission (variable) on a monthly basis. His commission consisted of about 60% of his pay and depended on the number and type of sales he achieved, paid at the time the sales contract was entered into and not when he actually carried out the work to achieve the sale.

From 19 December 2011 to 3 January 2012, Mr Lock went away on holiday during which time he was paid his basic salary and the commission he had earned on sales contracts entered into in the previous weeks. However, as he did no work during his holiday period, he didn’t generate any sales. Consequently, his salary was lower in the months following him taking his holiday as he received no commission, and therefore he ‘lost’ income by taking his holiday.

Decision and impact with the UK legislation

Mr Lock initially brought a claim for his ‘lost’ holiday pay in the employment tribunal. However, the tribunal referred his case to the Court of Justice of the European Union (CJEU) and raised with it the question of whether commission should be included in holiday pay and, if so, how this should be calculated?

The CJEU confirmed that the holiday pay required under the Directive is to enable a worker to actually take the leave to which he is entitled, and that commission should be included in the calculation of holiday pay, since it is “directly linked to his work in the company”. In essence, although the amount of Mr Lock’s commission varied on a monthly basis, the CJEU deemed it was permanent enough to be regarded as part of his normal monthly pay.

The main principle which the CJEU were keen to emphasise in coming to their decision was that employees should not be worse off because they have taken holiday. If they are, the risk is that employees will be deterred from taking their holiday entitlement, which would be contrary to the purpose of the Directive.

However, and rather unhelpfully, the CJEU left it to the UK to decide on how Mr Lock’s holiday pay should be calculated to include his commission payments. Employers in the UK will now have to painstakingly wait as the case goes back to the original employment tribunal to deal with how this decision should be implemented into UK law.

BPS Comment

The decision in Lock will obviously have a wide-reaching impact on employers, especially those with significant sales forces and areas where there are patterns of regular allowances or overtime. The impact may be immediate because the decision identifies a failure on the part of the UK government (and employers!) to properly apply the Working Time Directive.

What should employers be doing now?

Employers may already be facing exposure to claims by workers trying to seek arrears of holiday pay stretching back over a number of years. Consequently, the first thing an employer should do is to assess its liability. Although, Lock has been sent back to its original tribunal to decide how holiday pay should be calculated, we advise employers in the meantime to 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. When calculating, it will also be necessary to ensure that the holiday pay compensates for the fact that their employers are unable to earn commission during leave – we would suggest that some form of averaging of commission is the best way to do this.

It is vital for employers and employees to take advice and prepare themselves for the consequences of the decision in Lock. The risk and solutions will obviously be greater for employers as each case will vary.

If you would like to have an initial (free) chat about the decision in Lock and its implications for your business, please get in touch with our employment law specialist, Khurram Ahmad, on 0161 834 2623 or by email at khurram.ahmad@bpslaw.co.uk

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