The European Court of Justice (the ECJ) has handed down a controversial and potentially costly judgment for employers, holding that commission payments should be taken into account for the purposes of calculating statutory holiday pay under Article 7 of the Working Time Directive. As a result, employees may need to be paid elements of variable pay in addition to basic pay during a period of annual leave.

Article 7 of the Working Time Directive provides that workers are entitled to receive 4 weeks’ paid statutory minimum holiday in each holiday year.  The Working Time Regulations 1998, which implemented the Working Time Directive in the UK, provide for an additional 1.6 weeks paid leave. How to calculate pay during annual leave, particularly variable payments due to employees during these periods of paid leave, has not been entirely clear.  One previous ECJ decision had held that allowances and payments which are “intrinsically linked” to the performance of the worker’s tasks form part of his normal remuneration and should be taken into account in calculating holiday pay.

Commission payments

In the recent case the individual was paid a basic salary together with a variable commission payment on a monthly basis which comprised about 60 per cent of his total remuneration.  When he took holiday he received his fixed basic salary together with his commission earned on past sales over previous weeks.   However, since he did not carry out any work during his holiday period and so was not able to make new sales or follow up on potential sales, he was not able to generate any commission during his holiday period and this had an adverse effect on the amount of remuneration which he received in the months following his holiday.

The UK Employment Tribunal referred the case to the ECJ for a preliminary ruling as to whether  his statutory holiday pay should include an amount to reflect  the commission he would have earned had he not taken holiday.

ECJ decision

The ECJ held that the right to paid holiday is a fundamental social right and an important principle of EU social law. It stated that as the employee could suffer a financial disadvantage after he took his holiday, this might deter him from taking holiday contrary to the purposes of the Working Time Directive. The fact that the reduction in his remuneration took effect after his holiday had been taken was irrelevant.

Therefore, the ECJ held that the employee’s commission payments were directly (and intrinsically) linked to the performance of his duties under his employment contract and as such, commission must be taken into account in the calculation of his statutory holiday pay.

Outstanding issues

There are various issues that remain outstanding from the ECJ decision:

  • The method of calculating the sum due was referred back to the employment tribunal to assess on the basis of average commission earned over a representative reference period. The employment tribunal’s approach to the representative reference period is awaited.
  • What other payments will be relevant?  This may extend to cover overtime payments and bonus payments which employees would had earned had they not been on holiday. A case on overtime payments is due to be heard in the UK courts at the end of July.
  • How far back can employees claim?
  • What about the additional 1.6 weeks’ holiday under the Working Time Regulations 1998?
  • How should bonuses be treated? If a bonus is directly linked to the individual’s own performance, then arguably it should be included in holiday pay. However, a group bonus which depends on the market and other variables may not be intrinsically linked to the tasks performed by the employee.

In any event, employers should be taking steps to review their holiday policies to consider whether these should be amended to ensure that employees are not deterred from taking holiday.