The Court of Justice of the European Union (ECJ) has today held that commission should be included in the calculation of holiday pay in addition to basic salary. This is the effect of its judgment handed down today in Lock v British Gas Trading Limited, in which it agreed with the Advocate General’s opinion.

The Advocate General delivered his opinion in December 2013 that, remuneration whilst on annual leave should include an amount to reflect commission that would have been earned, if the employee had not taken annual leave. In coming to this view, the Advocate General noted the case ofWilliams v British Airways. In that case the ECJ held that, holiday pay under the Directive should equate to normal remuneration where there are normal working hours, which includes not only basic salary but also remuneration intrinsically linked to the performance of the task required by the employment contract. 

The main principle is that employees should not be worse off because they have taken holiday. If they are, the risk is that employees will be deterred from taking their holiday entitlement, which would be contrary to the purpose of the directive.

This decision today, which confirms the Advocate General's opinion, could have broad repercussions for employers, not only when calculating holiday pay in the future, but it could also result in significant liability for retrospective payments. Therefore, employers who have workers whose remuneration is made up of a basic salary and regular variable components directly linked to their work, for example, commission, should review the calculation of their holiday pay.

The question still to be resolved is how the commission element in respect of a period of holiday should be calculated. The Advocate General's view was that taking an average amount received by the employee over a representative period of for example, the previous 12 months, would be appropriate. However, this is for national courts to determine and further clarification of this issue is, therefore, needed. We are currently considering the implications of the decision and so please watch this space for an update.