Commission payments whilst on annual leave

Year Published: 2014

Recently, the Court of Justice of the European Union (CJEU) handed down its decision in Lock v British Gas, holding that commission payments fall within the concept of normal pay and should therefore be taken into account when calculating the holiday pay to which a worker is entitled.

Background to calculating pay

The EU Working Time Directive does not specify which elements of pay should be included when calculating statutory holiday pay. However, the UK courts have taken a restrictive approach, by applying the provisions of the Employment Rights Act 1996, and stating specifically that commission does not need to be included in such a calculation.

The case

The sales force of British Gas is paid a basic salary plus commission on sales achieved. The commission is a significant element of pay and is paid at least weeks, if not months, after the sale is achieved due to the number of obstacles to be overcome before the sale is completed e.g. credit checks.

Mr Lock brought his claim because, although his pay whilst on annual leave included commission from sales achieved prior to his holiday, he received no commission in subsequent months in respect of any sales he could have generated whilst on annual leave.

CJEU decision

The CJEU considered that the key question is ‘whether there is an intrinsic link between the work required to be done under the employee’s contract and the commission paid?’. The answer to that question is ’yes’. Recognising that in the month at issue during which Mr Lock took holiday, he appeared not to suffer a reduction in pay compared to months in which he was working and not taking holiday, the CJEU said:

“It must be noted that, notwithstanding the remuneration received by the worker during the period in which he actually takes his annual leave, he may be deterred from exercising his right to annual leave, given the financial disadvantage which, although deferred, is nonetheless genuinely suffered by him during the period following that of his annual leave.”

In other words, whilst on holiday, Mr Lock was deprived of the opportunity to earn commission which must inevitably affect his earnings later on and therefore created a disincentive for him to take annual leave. The CJEU considered it ‘irrelevant’ that the reduction in remuneration occurs after the period of annual leave.

However, the CJEU has not given any specific steer regarding how holiday pay should be calculated, leaving that question for the national courts to determine. The case will now go back to the Employment Tribunal which originally referred the case to the CJEU for a final determination.

How can the decision affect employers?

The CJEU’s decision could have a significant administrative and financial impact on employers whose remuneration structure includes commission payments, because in addition to a likely increase to the holiday pay bill in the future, workers could now make claims against their employers for historically having failed to include commission in their holiday pay.

What should affected employers do?

There are steps that employers could take now to address this issue, for example amending contracts. However, many will choose not to on the basis that it may still be some time before the Tribunals’ settle this issue. In particular, it is not clear precisely how the tribunal will determine the way that payment should be calculated.

For example, should it be over a 12 month reference period (as suggested by the Advocate General), or a shorter period, perhaps 3 months, in line with existing recognised practice in the UK?

Other payments: overtime

Recent European case law has extended the scope for including other elements of pay when calculating holiday pay and suggests that components of pay which are intrinsically linked to the performance of tasks which the worker is required to perform under his contract, or which relate to his status, must also be included when calculating holiday pay.

In one case (Neal v Freightliner Limited), an Employment Tribunal has held that voluntary overtime should be included when calculating holiday pay. This case was heard by the Employment Appeal Tribunal on 30 and 31 July 2014. However, no results have been published yet.

Additional leave

The Working Time Regulations 1998 provide workers in the UK with 1.6 weeks’ leave and pay in addition to the four weeks provided by the directive. This begs the question of whether the decision in ‘Lock’ applies also to determine what counts as holiday pay for that additional 1.6 weeks. This is still undetermined and the subject of debate.

For further advice on commissions payments or any other employment or HR matters, please contact our Employment and HR team on 0161 475 7676.

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