Retailers should be alert to the recent ruling in the ECJ that holiday pay must include a payment in respect of contractual sales-based commission rather than being based on basic salary alone.

The Case – Lock v British Gas Trading Ltd

Mr Lock is an energy salesman working for British Gas. His contractual commission based on completed sales represented about 60% of his monthly pay. When he was on annual leave he received basic salary and payments for commission he had earned in the previous period. However, he brought a case in the Tribunal claiming that, when calculating holiday pay, he should also be entitled to the commission payments he would have earned had he not taken annual leave. 

The Law

The European Working Time Directive (WTD) states that workers have a right to at least 4 weeks' annual paid leave. Recent case law[1] tells us pay should be calculated as "normal remuneration" which includes any payments "intrinsically linked" to the performance of the worker's tasks. It seems that commission would be "intrinsically linked" even if it only makes up a small part of remuneration, as it does for many retailers. The UK's Working Time Regulations 1998 (WTR) along with the Employment Rights Act 1996 (ERA) provide for basic salary only during annual leave. 

The Tribunal hearing Mr Lock’s case referred it to the ECJ which ruled that employees should be compensated for sales-based commission during holiday as it was so "intrinsically linked" to the performance of the worker's tasks. Key to the reasoning seems to be that otherwise employees may be discouraged from taking their holiday as they would receive less remuneration than they would if they stayed at work.

The ECJ then referred the case back to the Tribunal stating that it is up the UK courts to decide how  holiday pay should be calculated, although it suggested that calculations may be based on a 12-month period.

The Tribunal will need to consider whether the WTR and the week's pay provisions of the ERA can be interpreted in line with the ECJ's decision. Recent case law tells us that the Tribunal is likely to interpret the ECJ's decision broadly into UK legislation so that commission payments will have to be included in holiday pay calculations. It is most likely that the Tribunal will use a 12-week reference period as this is what is used to calculate other holiday payments.  

What lies in store

Retailers whose workers are entitled to commission will face significant financial burdens due to this decision as holiday payments will increase. On top of this, retailers could also face retrospective claims if there are a series of deductions from payments and the employee brings a claim within three months of the last deduction made, potentially going back to the date of the enactment of the WTR in 1998. Also there is no upper limit on the amount that a Tribunal can order to be paid where there has been an unlawful deduction from wages[2].

The one comfort for hard-hit retailers is that the decision is likely to apply only to the four weeks' holiday under the WTD, not the full 5.6 weeks specified by the WTR or any additional contractual holiday.

In a related development, two cases (Neal v Freightliner Ltd and Fulton v Bear Scotland Limited)  on whether overtime payments should be included in holiday pay calculations have been joined and will be heard in the EAT in July.

What to do now?

Some retailers may wish to change their policy for future holiday pay calculations so that they take account of commission. If employees do not challenge this within three months of the change, they will no longer have a claim to backdated payments. If following this approach, this should be done on a temporary basis so as not to create a precedent should the Tribunal not decide to interpret widely.

However until the UK Tribunal rules on the case, there is no obligation to award commission in holiday payments and no clarity as to how the commission should be calculated. Most retailers therefore will wait for that judgment.