A decision of the ECJ suggests that employers must include commission in the calculation of part of their statutory holiday pay.   The decision gives rise to significant potential liability for employers, both in terms of future holiday payments and possibly for past payments going back for several years. Employers who pay commission may wish to consider their potential exposure and take advice on their options in light of this decision.  Employers who pay overtime or some bonuses may also wish to consider how this decision may impact their existing holiday pay calculations in the future.

Background

The Working Time Directive (the "Directive") requires all European Member States to enact legislation guaranteeing the right to four weeks' paid holiday.  That obligation was implemented in the UK via the Working Time Regulations (the "Regulations"), which now guarantee 5.6 weeks of paid holiday (including bank holidays).  The additional 1.6 weeks of holiday is UK "gold-plating" which is not strictly required by the Directive.

The Directive does not stipulate how holiday pay is to be calculated. When the Regulations were enacted, the UK Government decided to use the existing concept of a "week's pay" set out in sections 221 to 224 of the Employment Rights Act.  That calculation has been in place for decades, and is used to calculate a week's pay for the purposes of statutory redundancy pay, among other things. The precise calculation depends on the employee's working hours, and can be extremely complex.

One particular complexity arises where employees receive commission for the work they carry out. The effect of the Court of Appeal's decision inEvans v Malley Organisation Limited in 2002 was that, in many cases, commission need not be included in the calculation of a week's pay. For some staff, this meant that their holiday pay was lower than the total pay that they would typically receive, because it was calculated on the basis of basic pay only. 

In 2012, the European Court handed down its decision in Williams & Others v British Airways Plc. That decision suggested that holiday pay should correspond to the pay that an employee would normally receive while at work. That decision is being relied on to challenge both the exclusion of overtime from holiday pay, as well as the exclusion of commission. The ECJ has now given judgment on the latter issue.

Lock v British Gas Trading Limited

Mr. Lock received commission on sales. That commission made up around 60 percent of his earnings.  He took a period of holiday from December 19, 2011 until January 3, 2012. During his holiday, he received holiday pay consisting of basic pay only, plus commission for sales achieved prior to his holiday.  The total sum equated to broadly his usual level of pay.  However, in later periods, his pay was reduced, because he did not achieve sales during the period when he was on holiday.

Mr. Lock brought an Employment Tribunal claim asserting that British Gas should have included in his holiday pay a sum reflecting his average commission. He relied on the decision of the ECJ in Williams in support of that argument. The Employment Tribunal referred the case to the ECJ for its determination as to whether holiday pay should include an average of his commission payments.

Decision

The ECJ considered the fact that, during his holiday, Mr. Lock did actually receive broadly his normal rate of pay.  However, it also noted that the reduction in the pay he received in subsequent months may dissuade him from taking his statutory holiday entitlement.  For that reason, the ECJ concluded that commission over a representative reference period should be included in the calculation of holiday pay for the days of holiday guaranteed by the Directive.  It noted that it is now for the UK's national courts to consider whether the holiday pay calculations provided for under national law achieve this requirement.

Comment

This decision is very significant indeed for employers who pay commission but do not include it in holiday pay.  Since that has been common practice up to now, this is likely to impact a great many employers.

Strictly speaking, the Employment Tribunal will now have to consider whether it is possible to interpret the UK legislation to give effect to this judgment.  If the Tribunal decides that the UK legislation can't be interpreted in this way, private employers will not be liable for underpayment of holiday pay; instead employees may be able to sue the UK Government for failure to implement the Directive properly. However, the more likely outcome is that the Employment Tribunal will interpret the UK legislation in such a way that it does give effect to this judgment.  If so, employers who have not included commission in holiday pay could face claims for underpayment of holiday pay, potentially even going back to when the Working Time Regulations were introduced in 1998.

There are some key points which employers should take away from this case, as follows:

  • This judgment relates to the four weeks of holiday guaranteed by the Directive only.  It does not oblige employers to pay commission for the additional 1.6 weeks of holiday required under the Regulations or any additional contractual holiday pay over and above that. Employers will need to consider, however, whether operating different approaches for different types of holiday is too impractical.
  • It is not yet clear how the Tribunals will give effect to this judgment in the context of the existing UK legislation.  We think that the most likely answer is that they will conclude that commission should be averaged over a 12-week period and included in holiday pay when holiday is taken, since that is provided for in sections 221 to 224 of the Employment Rights Act.  However, in Mr. Lock's case this would have resulted in him receiving more than his normal level of pay in December, and less than normal pay in subsequent months.
  • If, as we anticipate, the Employment Tribunal decides that the UK legislation can be interpreted consistently with the decision, employees who have been underpaid holiday pay can bring claims for unlawful deductions from wages.  The time limit for such claims is three months after the last in the series of deductions.  There is an argument that employees may only claim 6 years of arrears, but that argument is untested.  If it fails, an employee who was employed when the Regulations were implemented in October 1998 and is still employed by the same employer now may be able to claim for underpayments of holiday pay going right back to 1998.
  • Employers who pay commission should consider what their potential exposure is following this decision, and what they wish to do to address or mitigate that potential liability.  In particular, employers will need to consider whether to amend their holiday pay calculations now, with a view to limiting exposure for back-payments, or to wait for the Tribunal's decision (and possibly the decisions made at subsequent levels of appeal).  
  • If employers do amend their holiday pay calculations and, as is common, commission fluctuates over the year, some employees may see an opportunity to maximize their holiday pay by taking holiday immediately after a period when they expect to receive large commission payments. Employers may want to consider rejecting requests and requiring holiday to be taken at a different time when the impact of commission is less marked.

In addition, employers should also note that the EAT is due to consider whether overtime must be included in the calculation of statutory holiday pay in two conjoined cases to be heard at the end of July.  Following the decision in Lock, the direction of travel of the law in this area is clear.  Employers would be well-advised to consider how their holiday pay calculations would need to be amended to include overtime, in the (reasonably likely) event that the EAT concludes that it should be.