Holiday pay must include commission says the EU

By employment law solicitor, Philip Landau 

Under the Working Time Regulations (WTR), the majority of employees in the UK are entitled to 5.6 weeks paid annual leave.

The recent European Court of Justice (ECJ) ruling in the case of Lock v British Gas Trading Limited has clarified, however, that “holiday pay” should extend beyond basic salary to include commission payments, where such payments arise directly from the number of sales that you make.

The case leads on from a previous ruling in Williams v British Airways that remuneration paid in respect of annual leave should be the “normal remuneration” received by the worker. This case established that 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 Mr Lock’s case, his commission which was attributed to successful sales amounted to approximately 60% of his total salary whilst only 40% was his basic pay. He brought an Employment Tribunal claim for unlawful deduction of wages, on the basis of his lost income in the months following his period of annual leave. Lock suffered a sizeable depletion in his regular earnings because he had not been able to make commission during his time away from the office.

As the Working Time Regulations originated from European Law, the case was referred to the ECJ in order to clarify the law. The ECJ said the UK (and other member states) were obliged to factor in commission payments which a worker would have earned at work had he not been on annual leave, and if so, how such commission payments should be calculated.

The ECJ effectively said the purpose of the right to paid annual leave under the WTR was to put you in the financial position equivalent to you being at work. The spirit of The WTR was therefore to enable employees to take holiday without the concern of losing out financially. The ECJ said that if a significant proportion of an employee’s salary is commission based, taking annual leave becomes less inviting when it can result in a significant dent in your take home pay. In fact, employees would be discouraged from taking annual leave at all and the purpose of the legislation would be lost.

The ECJ, whilst making it clear that commission during holiday should be accounted for, has left it up to the national courts and tribunals to determine how holiday pay should actually be calculated in respect of commission payments. An average of previous commission payments would seem logical, but the ECJ provided no guidelines. It may be that this secondary issue will create more case law given the potential disputes regarding calculations of commission payments. For this reason, employers might be keen to tighten up commission policies to take into account what payments should be properly due for the holiday period.

The ruling is likely to be implemented directly into UK law and can operate retrospectively so there is a potential to claim historic lost payments for backdated holiday pay. For this reason, the ruling could have a considerable impact on both employer’s and employees alike.

Please feel free to contact Philip Landau about this or any other employment law matter.

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