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Legal Update: Holiday pay must include commission

Napthens - May 27th 2014

In the well-litigated area of holiday pay, a recent judgment of the Court of Justice of the European Union has held that commission payments should be taken into account when calculating a worker’s holiday pay.

Facts

Mr Lock sells energy products on behalf of British Gas, and he is paid a basic salary each month along with commission on sales he achieves. In this case, up to 60% of his monthly salary relates to commission. The commission is not paid at the time the sale is made. Rather, it is paid at least weeks - and sometimes months - after the sale, once certain criteria on the sale have been met.

Mr Lock brought a claim in the Employment Tribunal in connection with his employer’s failure to account for commission he could have generated whilst on annual leave. The Tribunal referred the matter to the European Court for guidance.

Held

The Court held that “the purpose of providing payment for annual leave is to put the worker, during such leave, in a position which is, as regards his salary, comparable to periods of work”. In this case, given Mr Lock was deprived of the opportunity to earn commission, this created a disincentive for him to take annual leave. The Court directed that measures should be taken to ensure holiday pay is paid by reference to commission as well as basic salary.

However the Court did not give any specific guidance on how the commission should be calculated, and left this for the UK courts to determine.

The case will now go back to the Employment Tribunal for a final determination.

Comment

The decision could have significant administrative and financial impact on employers who pay commission as part of the remuneration package. Not only will the cost of holiday pay go up in the future, workers could now make claims for failure to include commission in their holiday pay in the past. However, it is unhelpful that the European Court failed to provide guidance on how payment should be calculated, and we will have to wait to see what the Tribunals’ approach to this issue will be.

What should affected employers do?

The options available to employers are:

  • Take steps to amend practices to include commission within the holiday pay calculation, using a reference period that is considered fair and reasonable, according to how your business operates. For example, this could be a reference period of 12 months, as suggested by the Advocate General, or 12 weeks, in line with recognised UK practice. However, until further guidance becomes available, you should be mindful that choosing a reference period that purposely avoids paying the most commission could cause further litigation.
  • Wait for further guidance from the Tribunals on how calculation should be approached, which could take some time.

The preferred approach is likely to be to take immediate steps to start including commission within holiday pay calculation, as this could break the continuity chain of underpayment, meaning that employees could be prevented from claiming back pay unless they issue proceedings within 3 months of the last underpaid holiday. However, if you would like to discuss the best option for you, please contact a member of the Napthens HR team.

Overtime Update

Most employers will now be aware of the Neal v Freightliner case, in which an Employment Tribunal held that voluntary overtime should be included when calculating holiday pay. This case is to be heard by the Employment Appeal Tribunal on 30 and 31 July 2014, and we will update you on the outcome in due course.