Holiday pay should include commissions
Holiday pay has to include some consideration for any productivity bonuses given to production staff or commissions given to salespeople, writes DWF, a business law firm.
Following a string of judgments at Employment Tribunal level which brought into question the way holiday pay is calculated in the UK, we have been waiting for some higher authorities to shed some light on this conundrum. The first judgment on this issue was been handed down yesterday (22 May) by the Court of the European Union (CJEU) in the case of Lock v British Gas Trading Ltd.
The CJEU has followed the Advocate General’s opinion and held that commission payments do fall within the concept of normal pay and employers therefore should take commission payments into account when calculating a worker’s holiday pay.
In this case, Mr Lock’s salary comprised a basic salary and commission payments that were based on his sales. His commission made up more than 60% of his total remuneration. When he was on holiday, Mr Lock received an average of his pay over the preceding 12 weeks before he took the holiday.
However, he could not make any sales while on holiday and therefore he pursued a case to Tribunal on the basis that he suffered a loss in commission because it dropped in the period after he returned from holiday.
British Gas and the UK government argued that under UK legislation and practice the objective of the Working Time Directive (WTD) to pay normal remuneration during holiday, was achieved.
This was because during his period of paid annual leave, Mr Lock did receive a salary comparable to that earned during the 12 weeks preceding the annual leave, which comprised his basic salary and commission.
However, the problem, as British Gas conceded at the hearing, was that a worker does not generate any commission during their period of holiday and as a consequence the worker is paid only his basic salary upon his return to work after annual leave.
The result is that the adverse financial impact may deter the worker from actually taking annual leave.
The Advocate General emphasised in his opinion that this is all the more likely to act as a deterrent in a case like Lock, where commission represents more than half of the remuneration received by the worker.
The CJEU concluded that the WTD must be interpreted as precluding national legislation and practice which allows a worker whose remuneration consists of a basic salary and commission to be paid remuneration composed exclusively of his basic salary during periods of annual leave. In other words, commission must be factored in when calculating holiday pay.
Unhelpfully, the CJEU sidestepped a specific question it was asked about what principles were to be adopted by Member States when calculating the sum that is payable to the worker by reference to the commission that the worker would or might have earned if he had not taken annual leave.
The CJEU stated that it is for the national court or tribunal to assess, in light of the principles laid down in Williams v British Airways, whether the average pay calculated for Mr Lock in respect of his annual leave was compliant with the WTD. The case will now go back to the original Employment Tribunal for it to transpose this decision into UK law.
This decision is not surprising in light of the Advocate General’s opinion and the European approach to holiday pay, which had tended to side with the worker. Watch out for more commentary and guidance as this case goes back to Tribunal and the keenly awaited Employment Appeal Tribunal (EAT) decision in the joint cases of Neal v Freightliner and Fulton v Bear goes to the EAT on 30 and 31 July 2014.
Do contact DWF if you would like further advice on any preparatory steps you can take now to mitigate the risk of holiday pay claims and significant claims for back pay. This decision might lead to more novel approaches to commission-based roles, such as rolling up or applying an annual average to commission.