UK Employment Law Update: Commission can form part of holiday pay calculations

Section A: Summary

A recent Court of Justice of the European Union (“CJEU”) decision has held that an employee whose "normal remuneration" consists of regular commission, as well as a basic salary, must have that commission taken into account for the purposes of calculating their holiday pay entitlement.

Section B: The Working Time Directive

The Working Time Directive (“WTD”) provides that workers have the right to at least four weeks' paid annual leave. However, it does not specify how statutory holiday pay should be calculated.

The WTD is implemented into UK law by the Working Time Regulations (“WTR”), which state that employees must receive a week's pay for each week of leave.

It has already been decided in a previous case that the WTD requires that workers receive their "normal remuneration" while on holiday and any payments "intrinsically linked" to the performance of the worker's tasks form part of that normal remuneration.

The question in Lock v British Gas Trading LimitedC-539/12 was whether commission should be taken into account when calculating the worker's statutory holiday pay.

Section C: Facts of the case

Mr Lock, a salesman for British Gas, was paid basic salary plus commission on the sales that he achieved, which made up about 60% of his pay, on average. This was paid several weeks after a contract was concluded between British Gas and its new customer.

Mr Lock went on annual leave between 19th December 2011 and 3rd January 2012. During this time he was paid his basic salary. He suffered a reduced income in the months following his return to work because he had not secured sales, and had therefore not generated commission, while he was on holiday. He brought a claim in an employment tribunal, arguing that his reduced income amounted to a breach of the WTR. The Tribunal judge asked the CEJU for a ruling.

In December, 2013 Advocate General Bot gave his opinion. Whilst his opinion was not binding, he concluded that Mr Lock’s remuneration while on annual leave should include an amount to reflect the commission he would have earned had he not taken annual leave. The case then progressed to the CEJU.

Section D: Decision of the CEJU

The CEJU held that

"any inconvenient 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 be taken into account [for the purposes of calculating holiday pay].”

"In the case in the main proceedings ... the commission received by Mr Lock is directly linked to his work within the company. Consequently, there is an intrinsic link between the commission received each month by Mr Lock and the performance of the tasks he is required to carry out under his contract of employment."

(Emphasis added).

As such, the CEJU has confirmed that where a worker's normal pay consists of basic salary and commission elements directly linked to work, then holiday pay should be paid on the basis that a worker receives pay comparable to normal pay whilst on holiday (including such commission elements). Workers should not be deterred from taking leave because of not generating commission whilst they are absent.

The case will now return to the employment tribunal to determine how the commission element in respect of a period of holiday should be calculated. However, the Advocate General Bot’s view (which provides guidance only) was that taking an average amount received by the employee over a representative period of, for example, the previous 12 months, would be appropriate.

Section E: Conclusions

As long as there is an intrinsic link between the components making up the total remuneration of the employee and the performance of the tasks they are required to carry out under their contract of employment, then these components must be included in any holiday pay calculation.

Section F: Next steps for employers

Employers who have workers whose remuneration is made up of a basic salary and commission should review the calculation of their holiday pay once the employment tribunal’s decision has been given.

In the interim, such employers should:

  1. Consider carefully what holiday pay is paid for those with substantial commission elements.
  2. Review current incentive schemes and consider possible reconfiguration.
  3. Review potential liability for back-pay claims for such employees.