Holiday pay calculations must include commission

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. This resulted, in the weeks and months after the period of leave, in times when Mr L only received basic salary and not commission. This was because Mr L was not at work during the period of leave, did not make sales and did not generate any commission.

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 Attorney General’s opinion was that it should. The European Court, in a decision delivered today (22 May 2014), agreed.

The reasoning of the European Court is as follows:

1. Paid annual leave means ‘workers must receive their normal remuneration’ for the period of leave.
2. Normal remuneration means that workers are ‘in a position, as regards … salary, comparable with periods of work’.
3. This was not achieved by payment of commission already earned whilst on leave as the financial ‘disadvantage [was] deferred [and] genuinely suffered .. during the period following … annual leave’.
4. The financial disadvantage may deter a worker taking annual leave, more so where commission represents some 60% of take home pay and this is contrary to the objective of annual leave.
5. The European Court went on to consider how holiday pay might be calculated where the amount of commission payable varies.

In accordance with existing principles, the European Court re-emphasised 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’.
• ‘allowances relating to seniority, length of service and to professional qualifications must be maintained’.
• ‘components of the worker’s … remuneration … intended … to cover 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…’

It will now be for national courts to determine what should be paid ‘on the basis of an average over a reference period’.

In Practice

The practical implications of this case are not straightforward but its potential significance cannot be underestimated.

What we are sure of is that at some point, sooner or later, employers operating certain types of commission schemes will have to start calculating holiday pay to include ‘average’ commission. It is also likely that employers will face claims for the difference between holiday pay actually paid and what should have been paid potentially dating back to when the Working Time Regulations were introduced on 1 October 1998.

If this decision affects your organisation you need to act now and get detailed legal advice. Employers with commission schemes need to:

• assess if this case applies to their commission scheme;
• if so, consider options and tactics about including commission in holiday pay now or later;
• amend existing commission schemes to reduce the potential exposure going forward; and
• assess the scope and potential value of claims for back pay.

We can help. Get in touch today and be one step ahead of your employees who are sure to be considering their options.