What's the development?

The way that employers pay their workers for holiday pay will potentially need to change as a result of the decision of the Court of Justice of the European Union (CJEU) in Lock v British Gas Trading Limited, which established that holiday pay can no longer be based on basic salary only, unless basic salary is the only remuneration which a worker earns. It should instead be based on the remuneration the worker would normally have received while at work. This means that if a worker is paid commission, for example on the basis of sales that they make, such commission should be included in the calculation of their holiday pay. This will result in an increased holiday pay bill for many employers.

Background

Mr Lock is an Internal Energy Sales Consultant for British Gas. His role is to persuade business clients to buy British Gas energy products. In addition to a basic salary, he receives commission in respect of sales achieved by him. During periods of annual leave he was not able to make any new sales or follow up on potential sales. Therefore, he was not able to generate any commission during that period. This had an adverse effect on the overall salary Mr Lock received during the months following when a period of annual leave had been taken.

The European Court's decision

The CJEU held that holiday pay should be an amount that is equivalent to the "normal remuneration" received by a worker. Where remuneration is made up of several components then the normal remuneration should include any aspect which is intrinsically linked to the performance of the tasks which the worker is required to carry out under his contract. Mr Lock's commission was directly linked to his work for British Gas, which was to generate sales for them.

Compliance by employers

In the UK, workers benefit from a minimum of 5.6 weeks' statutory holiday, although some employers provide workers with more than the minimum. However, it is only the first four weeks of annual leave which are affected by this decision to include commission as this is the period of paid annual leave which is covered by  underlying European law. This means that employers are not legally required to account for commission in respect of holiday taken in excess of four weeks.

Employers are also faced with the difficult task of working out how to incorporate an amount for commission in the payment of holiday pay. How far back should they go to make the calculation? The CJEU did not provide a reference period for employers to use and left it to the domestic courts to determine. In the UK the two reference periods which seem to be most likely to be used are 12 weeks or one year.

What does this mean for pension payments?

Pension benefits are usually linked in some way with an employee's pay, and the pension scheme rules say how pay is defined for this purpose and how benefits are calculated during periods of absence such as holidays.  So the impact of this case, if any, will depend on how the pension scheme is worded on these issues, how commission is currently treated in the pension scheme rules and what the UK tribunal will say about how commission should be calculated for the purposes of holiday pay.   Most schemes exclude fluctuating pay such as commission from the pensionable pay definition, but it is worth noting that the minimum rules for automatic enrolment, the new compulsory pension arrangements, do include commission, so that requirements to pay commission during holiday periods will impact on those pension contributions.

Is this the final position?

As a result of this case, employers are likely to find holiday pay calculations more difficult and costly going forward. The position could be further complicated by Neal v Freightliner Ltd, a case being heard in July in the UK's Employment Appeal Tribunal. This will deal with whether overtime should also be included in the calculation of a worker's holiday pay. If this decision is in line with theLock decision then this means that employers will potentially be faced with having a further addition to the cost of holiday pay.