Commission should be taken into account when calculating holiday pay

Date Added 24.07.14

A salesman was paid both basic pay and commission on sales. The commission varied month by month, and payments in some months related to work carried out in previous months.

While he was on annual leave his employer paid him commission earned from sales made in previous months. However, it calculated his statutory holiday pay by reference to his basic pay only, on the basis that an employee is unable to earn commission while on holiday. The employee claimed his holiday pay should take account of commission and the Employment Tribunal referred the question to the CJEU.

In his preliminary ruling last year, the Advocate General of the CJEU said employers should take commission into account when calculating holiday pay, because:

  • The purpose of paid annual leave is to enable the worker to rest and enjoy a period of relaxation and leisure.
  • The payment should put the worker, during such leave, in a position comparable to periods of work.
  • Any aspect ‘linked intrinsically’ to the performance of the tasks the worker is required to carry out, payment for which is included in the calculation of the worker’s total remuneration, must necessarily be taken into account for the purposes of the amount to which the worker is entitled during his annual leave. The Advocate General referred to the example of airline pilots who are paid for flying planes, but do not do so when on leave.

In this case, his opinion was that commission was intrinsically linked to the performance of the tasks the worker was required to carry out and must be taken into account in calculating holiday pay – despite the employer contending that the rate of commission had been adjusted to take into account that no commission could be earned during holiday periods.

In an important development for employers, the CJEU has confirmed its agreement with the Advocate General’s ruling. Employees who are usually paid commission (or any other variable element directly linked to the work they do) are now entitled to be paid that commission as part of their holiday pay.

However, while the Advocate General suggested that an appropriate method of calculating the amount of commission to be paid for holiday pay might be to base it on average commission over the last 12 months, he and the CJEU recommended this should be left to national courts and tribunals. Until the UK Employment Tribunal rules on this, it remains unclear how holiday pay for staff on commission should now be worked out.

Employers who have not been including commission in holiday pay may also need to consider whether they or the scheme members should increase contributions into staff pension schemes, and top up previous contributions.

The Employment Appeal Tribunal is also considering whether overtime should be included in statutory holiday pay.

Recommendations

  • Employers with staff who are paid commission should take that commission into account when calculating future holiday pay.
  • In relation to past holiday pay, they should also prepare for retrospective claims from employees who were not paid an element of commission.
  • Employers should take specialist legal advice on the amounts of commission to be included, as it is not yet clear how these should be calculated.
  • Employers should also consider the implications of the decision on employees’ share schemes.

Case ref: Lock v British Gas Trading Ltd (Judgment of the Court) [2014] EUECJ C-539/12

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