In a hotly anticipated decision, the Court of Justice of the European  Union (CJEU) has ruled that when calculating holiday pay for the  purposes of the Working Time Directive, employers must take into  account commission payments if these form part of a worker’s normal  remuneration.

Lock v British Gas Trading Limited involved an employee who  received a basic salary, plus regular commission payments based on  sales. During his annual leave, he was paid his basic salary, together  with the commission payments that fell due during that period for  previous sales. British Gas argued that this meant he had been paid  both salary and commission over his holiday period and so had no  claim. However, because Mr Lock did not make any sales during his  annual leave he received less income in the months following his  holiday. He therefore brought a claim in the Employment Tribunal for  outstanding holiday pay and it promptly referred the matter to the  CJEU. In 2013, the Advocate General ruled that Mr Lock should have  received remuneration in respect of his annual leave that reflected the  commission he would have earned had he not taken annual leave, even  though it might be received only at a point after his holiday was over.  It said that the commission payments were intrinsically linked to Mr  Lock’s role as a salesman and as such should form part of his normal  remuneration.

The CJEU has now upheld this approach and ruled that Mr Lock’s  holiday pay should have taken into account commission payments,  as otherwise he “may be deterred from exercising his right to annual  leave” (though in fact he was not, hence the claim). Unfortunately the  CJEU did not go so far as to say how Mr Lock’s holiday pay should now  be calculated, concluding that the detail of this was something for the  UK Courts to determine, in accordance with the principles identified in  European case law. It did, however, suggest that this meant assessing  notional commissions by use of a reference period long enough to be  “representative” of what his earnings from that period would probably  have been.

So where does this leave employers and what should they be doing  now? There is no doubt that this case is hugely significant and has  wide-reaching implications for many employers, at least in respect of  the basic four weeks’ leave entitlement derived from the Directive. 

Bear in mind that this is not technically a change in the law, but merely  clarification of it, and therefore that strictly-speaking the new position  has always applied. To the extent they have not already done so,  employers should now be reviewing their holiday pay arrangements  if they have workers who are entitled to variable payments such as  commission to determine whether or not changes may need to be  made to them. Future claims seem inevitable, both where existing pay  practices are not amended and in respect of underpaid holiday going  backwards potentially some years. 

In the meantime, we are waiting for the EAT’s decision in the cases of  Neal v Freightliner Ltd and Fulton v Bear Scotland Ltd which are  due to come before the EAT on 30 and 31 July 2014. These deal with  the separate but related issue of whether holiday pay should take into  account overtime pay. It is hard to conclude that the outcome will be  different since overtime, like commission, is intrinsically linked to the  performance of employment duties.