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Holiday pay and commission

Posted on 18th December 2013
Case law

The Attorney General (AG) of the ECJ has given a preliminary opinion that commission paid by British Gas to its employees (representing in excess of 60% of pay) should be included in the calculation of holiday pay.

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Commission was remuneration for work he carried out himself and therefore 'directly linked' to his work

Lock v British Gas Trading Ltd 2013

Background

Under the Working Time Regulations ('WTR') workers are entitled to 5.6 weeks' holiday paid at the rate of a ‘week's pay’ for each week of leave. Four weeks of this entitlement is governed by the Working Time Directive. 

A week’s pay is calculated using sections 221 to 224 of the Employment Rights Act 1996 ('ERA'). Under the ERA (broadly):

  • A worker with normal working hours whose pay does not vary ‘with the amount of work done’ is entitled to the weekly equivalent of that pay for each week of holiday.
  • A worker with normal hours but whose pay varies ‘with the amount of work done’ is entitled to weekly pay averaged over a 12 week period.
  • A worker who receives overtime pay for work over a ‘fixed’ (or minimum) number of hours is entitled to weekly pay based on the fixed hours only.
  • A worker with no normal working hours is entitled to weekly pay averaged over a 12 week period.

The facts

Mr L was employed by British Gas as an Internal Energy Sales Consultant.  He was paid a basic salary and commission based on the sales he made.  His commission represented, on average, over 60% of his take home pay.

British Gas paid holiday pay to Mr L based on his basic salary only plus commission on sales he had earned prior to the holiday period.  (It seems British Gas took the view that Mr L fell within the group of workers whose pay did not vary as a result of ‘the amount of work done’. Whilst it did vary, the variation was whether the work done resulted in a sale or not.)
 
Mr L brought a claim against British Gas contending that his holiday pay should be based on basic salary and average commission.  The employment tribunal asked the European Court of Justice (ECJ) whether employers should include commission when calculating holiday pay. 

The decision

The AG has given a preliminary view that employers should include average commission when calculating holiday pay.   The Advocate General took into account that:

1. Paid holiday enabled ‘the worker to rest and to enjoy a period of relaxation and leisure’

2. Remuneration for holiday must be paid at the workers ‘normal remuneration’.  This means that pay should be ‘comparable to periods of work’ and ‘correspond to the normal remuneration received by the worker’

3. Any remuneration ‘linked intrinsically to the performance of the tasks the worker is required to carry out under his contract of employment and in respect of which a monetary amount is provided which is included in the calculation of the worker’s total remuneration . . . must necessarily be taken into account for the purposes of the amount to which the worker is entitled during his annual leave’.

4. Any remuneration which covers ‘occasional or ancillary costs arising at the time of performance of the tasks which the worker is required to carry out under his contract of employment . . . need not be taken into account in the calculation of the payment to be made during annual leave’

5. Failure to include commission would deter workers from exercising their right to paid holiday as they could not close sales and therefore earn commission whilst on holiday (even though they may be paid commission for sales concluded earlier).

In the AG’s view the commission Mr L received from British Gas was ‘intrinsically linked’, and should be included in the calculation of holiday pay, because:

  • it was remuneration for work he carried out himself and therefore ‘directly linked’ to his work (rather than being, say, a bonus based on the performance of British Gas as a whole)
  • although the value of commission varied month to month it was ‘permanent enough for it to be regarded as forming part of [Mr L’s] normal remuneration . . . it [was] a constant component of his remuneration’
The AG has not given a ‘rule’ on any time period over which commission payments should be taken into account for calculating holiday pay.  The AG indicated that a representative period of 12 months would be an ‘appropriate solution’. 

In practice

This is the AG’s preliminary opinion and it may not be followed by the ECJ.  It does however sit alongside (and neatly with) recent cases that seem to be increasing the amount of holiday pay that employers have to pay (see our updates about holiday pay and overtime and holiday pay on termination

In our view the AG’s opinion is likely to be followed by the ECJ.  We don’t have any indication when the case will be considered by the ECJ.  If it is, the ECJ’s decision will have significant ramifications for payment of holiday pay going forward.  It may also result in a large number of claims for holiday pay already paid but at a rate excluding planning and factoring in this additional potential future cost into budgets and consider how claims for backdated holiday pay (if they arise) can be dealt with and funded.

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