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Holiday Pay and Commission

How should we calculate holiday pay for workers and employees earning commission?

Following the European Court of Justice (ECJ) decision in Lock v British Gas Trading Ltd the answer to this is currently unclear. The ECJ decided Mr Lock’s holiday pay should be calculated to include his commission.

Summary of the Decision

Mr L was an Internal Energy Sales Consultant for British Gas. He received a basic salary and commission. His commission payments were calculated on the sales he made and represented around 60% of his take home pay.

Mr L’s holiday pay was calculated on his basic salary only.  When Mr L was on holiday he received his holiday pay and commission payments for sales completed prior to his holiday. After his holiday, Mr L received his basic salary and continued to receive commission payments for sales completed prior to and after his holiday. During his holiday Mr L was not at work and did not make sales to generate commission.

Mr L claimed his holiday pay should be calculated to include basic salary and average commission. The ECJ agreed. The ECJ reasoned that: 

1.  Paid annual leave means 'workers must receive their normal remuneration' for the period of holiday.

2.  Normal remuneration means that workers are 'in a position, as regards ... salary, comparable with periods of work' and that 'any ... 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 and included in the calculation of the worker’s total remuneration must necessarily be taken into account for the purposes of calculating the amount to which the worker is entitled during his annual leave'.

3.  This was not achieved by payment of commission already earned whilst on holiday as the financial 'disadvantage [was] deferred [and] genuinely suffered … during the period following ... annual leave'.

4.  The financial disadvantage may deter a worker taking holiday, more so where commission represents some 60% of take home pay and this is contrary to the objective of holiday.

5.  The ECJ went on to consider how holiday pay might be calculated where the amount of commission payable varies, but left it for national courts to decide what should be paid 'on the basis of an average over a reference period'..

What do I need to do?

We cannot overstate the potential importance of this case for employers. Employers who operate commission schemes that fall within this decision will have to reconsider how holiday pay is calculated. This could mean a significant increase in the amount of holiday pay you have to pay and a negative impact on the bottom line.

Your first step is to review all the commission schemes you operate. You then need to consider if this decision applies to them.

Your next step depends on whether you are private organisation or public body.

I am a private organisation

The Leeds Employment Tribunal referred the case to the ECJ. The Leeds Employment Tribunal now need to consider how the ECJ decision will take effect in England and Wales. The Leeds Employment Tribunal have a number of options - they could:

1.  interpret the Working Time Regulations consistently with the ECJ decision and give effect to it. If this happens, you will need to recalculated the holiday pay payments you make to include appropriate commission; or

2.  decide that the government has to amend the Working Time Regulations to give effect to the ECJ decision. If this happens there will be a further delay before you need to start making increased holiday pay payments.

I am a public body

Public bodies are different. The decision applies now. If you are a public body operating a commission schemes which this decision applies to you should have already started to pay holiday pay including average of commission or have a plan in place to do so soon.

Holiday pay and overtime

The Employment Appeal Tribunal heard several cases in July 2014 about whether holiday pay should include certain overtime payments. A decision is expected sometime between October and December 2014. In the meantime, you need to be thinking about how this decision could impact you as an employer too.

Quantrills can help

Holiday pay is now a very sticky area.  One of our specialist employment law solicitors will:

  • Work with you and review your commission schemes to determine whether this decision applies to them.
  • Consider which employees and workers in your organisation are affected.
  • Advise you on the possibility of any claims for back pay because of holiday pay already paid which did not include commission.
  • Discuss with you your options. Do you start paying holiday pay including commission now? Do you wait for the Leeds Employment Tribunal decision? Do you wait for your staff to raise it?
  • Discuss whether you can make amendments to commission schemes to reduce your potential exposure to increased holiday pay payments now and in the future.
Get in touch today. Be one step ahead of your employees and workers. They are sure to be considering their options.

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Click here to contact us or phone us 01473 688100

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