What did the case decide?

The European Court of Justice has held that a worker is  entitled to be paid in respect of periods of annual leave by  reference to the commission payments he would have earned  during the period of absence (ZRJ Lock v British Gas Trading  Limited)

Case facts

Mr Lock’s income consisted of a base salary together with  commission payable monthly in arrears.  Commission was  paid by reference to sales resulting from his work.   Commission payments made up approximately 60% of Mr  Lock’s income.  

Mr Lock complained that he had been financially disadvantaged as a result of taking holiday because he would not  receive any commission in respect of the period of holiday.   He would not be make new sales during his holiday and would  not receive commission in respect of those “lost” sales.  This  would have an adverse impact on his income during the  months following his annual leave, as commission was paid in  arrears.  Given that commission made up the majority of his  income, the impact of not earning commission over periods  of holiday was significant.

ECJ decision

The European Court of Justice held that it was not open to an  employer to pay only basic salary in respect of periods of  holiday.  The employer was required to take into account  commission in the calculation of the total remuneration to  which an employee is entitled in respect of annual leave.  

Unhelpfully, the Court failed to give any firm guidance in  relation to how commission should be calculated for this  purpose.  The court stated that this was a matter for the  national court or tribunal to assess.  It did, however, indicate  that the calculation should be based on average commission  received over a reference period which is considered  representative under national law.  

What this means in practice will have to be determined by the  tribunal when the matter is remitted to the English courts.   The most obvious reference period is the 12 weeks period  used under the working time regulations to calculate the  income of those without normal working hours. 

Accordingly, whilst it is clear that commission payments need  to be included in the remuneration payable to workers in  respect of paid leave, the basis for doing so is not.  

What action do employers need to take?

Our view is that employers will decide not to take any action  at present.  Any clarification provided by the UK courts in the  future would be likely to result in changes to the working time  regulations.  As there is no date yet set for the hearing of the  case by the English courts, clarity is unlikely to be achieved for  some time.  In the meantime, employers might wish to review  the basis on which commission schemes operate to assess  the likely impact of the decision on current practice in  relation to payment of commission in respect of paid holiday.

Where schemes are renewed on an annual basis or give the  employer the right to make changes to a scheme, consideration could be given to altering the scheme to build in an  additional amount to be paid in respect of annual holiday.   This need not result in a larger overall payout from a scheme  as the level of commission payable could be adjusted  downwards to take account of the additional amount payable  in respect of periods of holiday.  However, any such alteration  to a scheme would need to assume an average amount of  commission to pay in respect of periods of holiday and as the  lawful method of doing this is not clear, it is possible that  changes made at this point would not be compliant with any  future changes to the working time regulations.

One benefit that may flow from making changes to a scheme  at this point is that a change in practice could assist an  employer in defeating a claim for backdated holiday pay.  Such  a claim could be based on the argument that the employer  had been making a series of unlawful deductions by not  paying commission in respect of periods of holiday.  Where the chain of deductions is broken by paying an element of  commission in respect of holiday, the employee might  become time barred from claiming in respect of earlier  periods.

If pressed by an employee to pay an additional amount of  holiday pay in the light of the decision, an employer could  push back, saying that the legal position is unclear and that  guidance from the English courts is required before any  additional payment can be made.  

Will the decision have a wider impact?

The decision is unlikely to have any impact on the operation of  annual discretionary bonus schemes or to the operation of  bonus pools where a percentage of revenues is allocated to a  pool to be distributed amongst eligible employees at the end  of a scheme year.  The actual impact of the decision is likely to  turn on the terms of the particular scheme which will need to  be carefully reviewed before drawing any conclusions.

There are two further cases due to be heard by the EAT at the  end of July which will examine the extent to which overtime  payments need to be factored in to the calculation of holiday  pay so this issue is likely to remain in the spotlight for the  foreseeable future.