The European Court of Justice (ECJ) has ruled that employers must include commission in holiday pay.
Somewhat earlier than expected, the ECJ has handed down its decision in Lock v British Gas on 22nd May 2014 confirming the fears of employers after the Advocate General had earlier expressed his opinion late last year, that commission should indeed be included when calculating holiday pay.
This effectively means that any workers whose pay is recognised either wholly or partly in commission will be entitled to have this reflected in their holiday pay.
Mr Lock originally brought his case in the Leicester Employment Tribunals in respect of his employment with British Gas as an Internal Energy Sales Consultant where he was paid a basic monthly salary of ?1,222.50 plus commission, which was also paid on a monthly basis.
Mr. Lock took annual leave between 19th December 2011 and 3rd January 2012. In December 2011 he was paid his basic salary and the commission that he had earned over the previous weeks. During his annual leave, Mr.Lock did not generate any commission with the effect that in the following weeks his salary was less.
Under the Working Time Directive, which is implemented in UK legislation through the Working Time Regulations 1998, every worker has the right to paid annual leave. These regulations entitle a worker to be paid during statutory annual leave at a rate of a week?s pay for each week of leave. The vast majority of workers presently receive basic salary during this leave in the UK.
When the case was referred to the ECJ, the Court needed to consider whether or not the Working Time Directive would require commission to be included in this holiday pay.
The ECJ held that Mr Lock?s commission was directly linked to the work he carried out, and so must be taken into account when calculating his holiday pay. Despite the fact his commission fluctuated from month to month, it was permanent enough for it to be regarded as forming a normal part of his salary.
This could have a huge impact for employers particularly in commission-heavy sectors and this will now inevitably lead to far more complex holiday pay calculations in the future and the possibility of employees taking advantage after high commission periods of sales to take their holidays.
The ECJ has now left the method of calculating Mr Lock?s compensation and indeed the new rules on holiday pay with add-ons to the national courts or tribunals to ensure compliance with Article 7 of the Directive.
The case reaffirms the principle that where a worker’s pay consists of a basic salary and variable elements directly linked to work, then holiday pay should be paid on the basis that a worker receives pay comparable to normal pay whilst on holiday, and thus is not deterred from taking leave by financial considerations.
It leaves open the question of how best to ensure that the objectives of the directive are met and it may be that employers will need to engage in some form of ‘rolling-up’ of commission on an averaging basis.
It may also result in a reduction generally in commission levels to compensate.
We cannot see the Government rushing to make any amendments to the Working Time Regulations to implement the effect of this judgment but it is clear that companies will need to revisit contractual arrangements on leave entitlement to ensure that commission or other relevant variable payments are factored into holiday pay due under the Directive
Watch this space…