The CJEU finds that if a worker is paid commission calculated on the basis of the sales that they make, that commission must also be included in the calculation of holiday pay.

Background

Calculating the correct amount of holiday pay owed to a worker can prove to be a tricky task for an employer. In 2012 the Court of Justice of the European Union (CJEU) and subsequent Supreme Court judgments in British Airways plc v Williams established that a worker must be no worse off financially during annual leave than if he/she had continued working. So, under EU law, workers are entitled to receive their 'normal remuneration' when taking statutory holiday leave. This includes not only basic salary but also remuneration 'intrinsically linked to the performance of the tasks'.

Given this, Williams brought into question whether other types of workers could argue that certain commission payments or non-guaranteed overtime currently excluded from holiday pay form part of their 'normal remuneration' Has Williams opened another holiday pay floodgate?

Last summer, an employment tribunal decision in Neal v Freightliner Limited found that holiday pay must include non-guaranteed overtime, whether compulsory or voluntary. Furthermore, an individual could potentially claim for several years of underpayments on the basis that the underpayments are a series of unlawful deductions from wages. In Neal, the individual was able to claim for underpayments going back to 2007 when his employment began. Had he been employed prior to that, he could have claimed as far back as the introduction of the Working Time Regulations on 1 October 1998.

In Fulton v Bear Scotland, a Scottish tribunal similarly held that Mr Fulton had suffered a series of unlawful deductions when he received holiday pay by reference to basic pay and hours only. The tribunal held the holiday pay should have been calculated by reference to the average over 12 weeks of basic pay, overtime, standby payments, emergency call-out supplements and supplements for being a charge hand.

Both the Neal and Fulton decisions are currently under appeal and listed to be heard together by the Employment Appeal Tribunal at the end of July but the direction of travel seems fairly clear.

Lock v British Gas Trading Ltd

Since 2010, Mr Lock has been employed by British Gas as an Internal Energy Sales Consultant. His remuneration consists of two main components: a basic salary and commission. The commission, also payable on a monthly basis, is calculated on the basis of the sales made by Mr Lock. It is paid not at the time that the sales are made, but several weeks or months following the conclusion of the contract between British Gas and the client.

Mr Lock was on holiday from 19 December 2011 to 3 January 2012. His holiday pay included not only his basic salary, but also the commission resulting from sales achieved during previous weeks, BUT he could not generate any commission during the period of his annual leave which had an adverse effect on his pay during the months following his annual leave.

Decision of the CJEU - commission must be included

Before the CJEU, British Gas acknowledged that the purpose of holiday pay is to put the worker, during that period of rest, in a situation which is, as regards his pay, comparable to periods of work. It went on to argue that this objective was achieved since Mr Lock received, during his annual leave, pay which included not only his basic salary, but also the commission resulting from sales achieved during previous weeks.

The CJEU rejected that argument. There was still a financial disadvantage which, although deferred, was nonetheless genuinely suffered by him during the period following that leave. As British Gas conceded, the worker does not generate any commission during the period of his annual leave. Consequently, in the period following his annual leave the worker is only paid his basic salary. That adverse financial impact may deter the worker from actually taking leave, which is all the more likely in a situation such as Mr Lock's, in which commission represents on average over 60% of his monthly wage. This would be contrary to the intention of the Directive.

Decision of the CJEU - calculating the commission payable during annual leave

The CJEU observes that holiday pay must, in principle," be determined in such a way as to correspond to the normal remuneration received by the worker. Where the remuneration received by a worker is made up of several components, the determination of the normal remuneration payable during annual leave requires a specific analysis… Any aspect which is linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment and in respect of which a monetary amount is provided must necessarily be taken into account for the purposes of calculating the amount to which the worker is entitled during his annual leave".

In the case of Mr Lock, the commission was directly linked to his work within the company. It followed that such commission must be taken into account in the calculation of the total annual remuneration. In other words, commission that couldn't be earned due to a worker being on holiday must be taken into account in the subsequent pay period.

As to the actual calculations, the CJEU simply states it is for the UK court or tribunal to determine, on the basis of an average over a reference period which is considered to be representative. So, we will have to wait and see, although a 12 week reference period is a good bet.

Implications for employers

The effect of the decision is that commission that couldn't be earned due to a worker being on holiday must be taken into account in the subsequent pay period. This will inevitably lead to a considerable rise in holiday pay bills for many employers.

Under UK law, workers are entitled to 5.6 weeks annual leave. However, it is only the first four weeks of leave under regulation 13 that derives from the Working Time Directive. The additional 1.6 weeks under regulation 13A is a matter of UK law only. Strictly speaking, the judgment of the CJEUin this case only applies to the regulation 13 leave (four weeks). However, splitting out the additional 1.6 weeks leave may prove to be an administrative headache and more trouble than it is worth.

Employers will also have to put in place a mechanism for calculating a figure for the commission that could not be earned due to annual leave. Where commission payments fluctuate this may prove difficult. What will be the 'appropriate reference period' may vary depending on the role in question, although a 12 week reference period is likely to be considered appropriate.

More complicated and costly holiday pay calculations seem inevitable. This case, together with the cases of Neal and Fulton, indicate that holiday payment calculations are moving towards being based on workers' average earnings in the 12 weeks leading up to their holiday for an ever increasing group of workers (not just those without normal working hours).

Action points for employers to consider.

Some points employers may wish to consider are:

  1. Take commission into consideration alongside other premiums in holiday pay calculations (Lock).
  2. Take paid overtime (whether voluntary or not) into consideration alongside other premiums in holiday pay calculations (Neal).
  3. Carry out an audit of overtime and commission payments to ascertain the extent of the potential issue for your business.
  4. Review the terms and conditions of employment contracts and check that they accurately reflect how holiday pay is calculated:
    1. Check that the calculation is communicated clearly within the employment contracts;
    2. Review the calculation regularly (at least once a year).
  5. Remember paid holiday leave is important to individuals. If you receive a grievance, deal with it appropriately. Relatively small individual claims can quickly escalate to an employee relations nightmare.
  6. Remember a number of small claims can quickly accumulate to a very significant cost where large workforces are concerned.
  7. If you receive a claim for back payments seek legal advice:
    1. Remember, claims should be limited to four weeks' annual leave (per leave year where a series of deductions is claimed);
    2. Keep in mind the new tribunal fees scheme in negotiating any settlement. An individual may be willing to settle a relatively modest individual back claim rather than pay out the £160 tribunal issue fee and £230 hearing fee. On the flip side, where a worker succeeds in a claim, the tribunal will almost certainly require the unsuccessful employer to repay the fees.