Recent case could change the face of holiday pay for commission based workers

A recent opinion given by the Advocate General (AG) regarding commission in holiday pay calculations could have far-reaching consequences for many businesses and their workers if accepted by the European Court of Justice (ECJ).  Howard Robson, Employment Partner, reviews the case in which the opinion  was delivered, Lock v British Gas Trading Limited, and advises how employers can prepare for the future.

In this case, Mr Lock was an energy salesman for British Gas Trading.  His monthly commission was on average £1912.67 which, on top of his basic salary of £1222.50, made up approximately 60% of his total income.  During his 2 weeks annual leave in December 2011 he received his basic pay as well as a commission from his sales made in previous weeks.  Whilst on annual leave he was obviously not generating future sales leads, so while he was not financially impacted during his period of annual leave, it was when he returned to work that his commission suffered, discouraging him from taking his entitlement to holiday.

Based on this, Mr Lock brought a claim in the employment tribunal stating that this was a breach of the Working Time Regulations 1998 (WTR), which state that a worker has the right to at least four weeks paid holiday for the purpose of rest and relaxation.  He also brought a claim for unlawful deduction of wages as his commission saw a decline because he had taken annual leave.

When reviewing the case, the AG indicated that any financial remuneration which is intrinsically linked to the employee’s performance of tasks as stated in their contract must be taken into consideration when calculating holiday pay.  Based on this, a worker who earns regular commission should have their holiday pay based on three components:

• Basic salary
• An amount equal to the average amount of commission the employee would ordinarily earn while working.
• Any commission falling due for payment while the worker is on annual leave

The ECJ will be hearing the case next year and its outcome will determine whether employers must include notional commission when calculating a worker’s holiday pay.  If, as generally occurs, the AG’s opinion is adopted by the ECJ, employees would be paid more basic pay while on annual leave than when in work to cover the decline in commission following their return to work.  This could also leave employers open to claims for previous periods of leave.

The ECJ would need to set a benchmark in order to calculate an amount to an employees normal pay; for example whether commission should be based on the previous month’s earnings, or perhaps earnings over the previous three months.  It will also be interesting to see if this rule would apply to all periods of leave such as sickness, maternity or paternity etc, or just the four weeks paid holiday.

There are precautions that employers can take in anticipation of the ECJ’s decision, due next year, such as finding alternative ways to pay commission.  If you’d like more advice on how you can prepare, contact Howard or the Employment Team on 02380 717717 or visit their section of the website here.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.