Holiday Pay Calculations Must Take Commission into Account

The ECJ has ruled that holiday pay should include an amount to reflect the commission the worker would have earned had they not been on holiday.

In Lock v British Gas Trading Ltd, L received a basic salary plus commission on sales he achieved. Commission made up approximately 60% of his remuneration and was paid several weeks/months after the sale was concluded. When he took holiday between 19 December 2011 and 3 January 2012, he was paid salary plus the commission that fell due during that period. However, he then suffered a reduced income in the months following his holiday as he had not made any sales whilst on holiday. 

L brought a claim for unpaid holiday and the employment tribunal asked whether this arrangement, where commission was lower as a result of taking annual leave, fell foul of the Working Time Directive which requires that workers are provided with at least four weeks’ paid annual leave. 

The Advocate-General considered that L’s commission arrangements did not comply with the Working Time Directive and the ECJ has now agreed. Under the Working Time Directive, workers must receive their “normal remuneration” during annual leave. This includes any sums intrinsically linked to the tasks carried out under the employment contract. The fact that L was not able to earn commission during his holiday led to a financial disadvantage, albeit some weeks after he took his holiday. As a reduction in remuneration is liable to deter a worker from taking holiday, the arrangement was contrary to the objective of the Working Time Directive. The fact that the reduction in earnings occurred some time after the holiday period was irrelevant. As L’s commission payments were directly and intrinsically linked to the tasks he carried out under his employment contract, commission had to be taken into account in the calculation of his holiday pay.

The ECJ stated that it was for the national court to determine how the amount of commission included in holiday pay should be calculated, based on ECJ case law and the Directive’s objectives. However, the tribunal should focus on the average commission earned in a reference period considered to be representative under national law.

UK provisions dealing with the calculation of holiday arguably exclude commission from the calculation. This means that the employment tribunal, to whom this case will now return, will need to decide whether it can interpret UK law in order to give effect to the ECJ’s decision. It seems likely that it will be prepared to do this and require British Gas to pay L additional holiday pay. As UK provisions dealing with the calculation of holiday use a 12 week reference period it is likely that the employment tribunal will use the 12 week period prior to the holiday period to calculate the average commission earned in that period when calculating holiday pay. 

The ECJ’s decision has far-reaching consequences for employers with staff whose remuneration includes a commission element. Whilst the decision only applies where commission is directly linked to tasks workers are required to perform under the employment contract, this is likely to be the case for most commission arrangements. It is also possible that overtime will have to be included in holiday pay calculations. An appeal to the Employment Appeal Tribunal on this question is due to be heard at the end of July.

Employers should review their holiday pay policies as a matter of urgency and make sure that workers are paid at the appropriate rate. Employers could potentially face claims going back a number of years. Anyone with concerns or who would like further advice on managing this issue should contact their usual Doyle Clayton adviser or info@doyleclayton.co.uk.