An Advocate General to the European Court has given an opinion, in a case brought by a UK worker, that when calculating holiday pay for workers who earn commission, employers must include an amount reflecting the commission the employee would have earned if not on holiday and cannot limit holiday pay to basic salary. The opinion has no legal effect, but if followed by the Court when it makes it's decision in the case it could lead to significant additional costs for employers who pay commission, including claims for back pay.
The Working Time Regulations set out the minimum holiday entitlement to which UK workers are entitled each year. In doing so, it implements the holiday provisions of Working Time Directive, which requires all EU Member States to guarantee a basic level of annual holiday.
We recently reported on a number of cases which are under consideration in this area.
The Working Time Directive states that workers must be paid for the minimum holiday entitlement they take, but does not say how that pay should be calculated. The Working Time Regulations require that that holiday is paid at the rate of a "week's pay" for each week of leave. The manner in which a "week's pay" is calculated for these purposes is surprisingly complex, and depends on whether the worker has normal working hours, and whether his/her pay varies depending on the amount of work done (e.g. piece workers) or the time at which he works (e.g. shift workers).
Since the decision of the Court of Appeal in Evans -v- Malley Organisation Limited in 2002, it has been established law that staff who are paid commission do not generally fall into the category of workers whose pay varies with the amount of work done. This is because commission is not typically a reward for work done, but is a reward for the product of that work, e.g. the number of sales made. This means that the Working Time Regulations typically do not require employers to include commission in the calculation of holiday pay.
Lock -v- British Gas Trading Limited
Mr. Lock is employed as a sales consultant for British Gas. He earns commission based on his sales. In reliance on the decision in Evans, British Gas paid Mr. Lock holiday pay at the rate of basic pay only. He continued to receive commission for sales made before and after his holiday, but that commission was not taken into account in calculating the rate of holiday pay paid to him.
Mr. Lock brought a claim in the Leicester Employment Tribunal for unpaid holiday pay, arguing that commission should have been included in the calculation. He relied on the decision of the Court of Justice of the European Union ("CJEU") in Williams & Others -v- British Airways Plc, in which the CJEU stated that it was not sufficient to pay only basic pay for the periods of holiday guaranteed by the Working Time Directive. Instead, the Directive requires that the remuneration paid in respect of that holiday must correspond to the remuneration received while the individual is at work. Mr. Lock argued that this meant that Evans was wrongly decided, and British Gas should include in his holiday pay an average amount of the commission he earned while working. The Tribunal referred the matter to the CJEU, so that it could decide whether commission had to be included.
Advocate General's Opinion
When a case is referred to the CJEU, an Advocate General appointed by the Court gives an opinion on what he or she believes is the answer to the question before the Court. The Advocate General's opinion is not binding on the CJEU (or anyone else). It is simply intended to provide guidance to the Court.
The Advocate General in Lock has concluded that an average of the commission earned by Mr. Lock should have been included in his holiday pay. This is because:
- The commission is directly linked to the work Mr. Lock carries out under his contract of employment;
- Although his commission fluctuates depending on his sales, it is sufficiently permanent that it can be regarded as forming part of his normal remuneration; and
- If commission is not included, a worker may be discouraged from taking his/her minimum holiday entitlement, because it may result in a reduction in the commission he/she earns.
The Advocate General suggested that the amount of commission to be included should be determined by reference to a representative period, for example Mr. Lock's average commission over the last 12 months. He did not consider whether the 12-week reference period which the Working Time Regulations provides for would be legitimate.
This opinion is not binding on employers, and it is possible that the CJEU will depart from it when it makes its decision. However, if the CJEU does follow the Advocate General's Opinion, that is likely to have a significant impact on employers who do not currently include commission in holiday pay. Those employers will need to reconsider their holiday pay practice for future payments. Perhaps more significantly, however, they may face claims for back pay from existing staff in respect of past holiday, possibly going right back to the introduction of the Working Time Regulations in October 1998.
We would not recommend that employers make changes to holiday pay calculations on the basis of this opinion, since it is not binding and the CJEU may depart from it. However, in light of this decision, and the recent Tribunal decision in Neal -v- Freightliner Limited employers whose staff receive commission, overtime, or other variable payments may wish to consider how they would address: (a) future holiday pay calculations; and (b) past liabilities, if it transpires that such payments should have been included in holiday pay.