The Advocate General has issued a potentially significant Opinion relating to the correct calculation of holiday pay, undermining the current domestic arrangements under the Working Time Regulations 1998 (“WTR”).
In the case of Lock v British Gas, he has concluded that where an employee receives a basic salary and variable commission, his holiday pay must include not only the basic salary but an amount equivalent to what the employee might have earnt by way of commission during the holiday period. If followed when the case comes to be considered by the Court, this decision will mean that employers will have to increase holiday pay for employees who work on commission (and potentially who have other variable elements to remuneration).

Mr Lock was a salesman for British Gas whose pay consisted of both basic pay and commission. His commission was paid in arrears, and fluctuated from month to month, but made up about 60% of his overall pay. When he took holiday he was unable to generate commission so that his salary for the period that followed was lower than other times. Mr Lock brought a claim for outstanding holiday pay in an employment tribunal. The employment tribunal made a reference to the ECJ asking whether Article 7 of the Working time Directive (which covers the annual entitlement to 4 weeks paid holiday leave) required commission to be included in holiday pay and if so how that should be calculated.

The Advocate General’s Opinion emphasised both that the right to annual leave is a “particularly important principle of European social law from which there can be no derogation” and also that the purpose of the entitlement is to enable the worker to rest and to enjoy a period of “relaxation and leisure”. If holiday pay was not maintained at the normal level of remuneration for that period it would deter the employee from exercising his right to that leave, particularly in situations when commission represented a significant proportion of remuneration. A worker would find himself in a less favourable situation than if he had worked.  British Gas’ arguments that the commission scheme was organised to take account of the fact employees would take holiday were not accepted.

Turning to the way in which a variable component of remuneration could be calculated for holiday pay purposes the Advocate General stated that it was for the referring tribunal to determine the methods and rules which were appropriate. However he did state that to take into account the average amount of commission received by the worker over a representative period, for example 12 months, would appear to be an appropriate solution, and noted that Member States could not adopt a mechanism that would “affect the worker’s right to enjoy, during his period of rest and relaxation, economic conditions which are comparable to those relating to the exercise of his employment”.

While no action is currently required by employers as we now await the ECJ’s judgment, businesses would be wise to begin consideration of how their pay is currently structured.  The ECJ is not bound to follow the Advocate General’s Opinion, but often does so, and this case follows others in recent times (notably Williams and others, relating to pilots’ holiday rights) where this principle of creating an environment where workers are no worse off by taking holiday has gained support.

This could be a significant case affecting the calculation of “pay” generally, given that it moves away from the current UK calculation approach of referring to the “week’s pay” provisions in the Employment Rights Act 1996. To add to this complexity, any ECJ ruling would also not impact automatically on the additional 1.6 weeks’ leave UK workers have enjoyed for some time now under WTR.

While the week’s pay provisions are generally accepted as being tortuous to deal with, it is going to be far from easy for businesses to structure commission schemes and holiday pay in a way that achieves the balance of complying with the Opinion, and prevents abuse by employees who seek, for example, to time holidays to inflate possible holiday pay.  However, it seems very likely that if the ECJ follows this Opinion, employers who must brace themselves to pay higher holiday pay based on more complex calculations, or negotiate material restructures to remuneration arrangements.

Please click here to see Advocate General's Opinion.