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05th June 2014

European Court of Justice confirms holiday pay

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Article written 5th June 2014

Earlier this year we considered the Advocate General’s opinion in relation to the case of Locke v British Gas Trading Plc which looked at whether holiday pay should include commission payments (read it here)

The Advocate General’s view was that, where an employee receives both basic salary and commission as part of their remuneration, commission payments should be taken into account when calculating the employee’s holiday pay.

The Advocate General’s opinion was however just that - an opinion - and was not, therefore, binding upon the European Court of Justice (ECJ). Therefore, when we last reported on this issue we were waiting for this case to be heard by the ECJ for clarification.

The ECJ has now heard this case and has held that, where an employee receives commission as part of their remuneration, any payment in respect of holiday should include an amount to compensate for the commission the employee would have earned if they had been at work.

The case therefore confirms that where a worker's pay consists of a basic salary and other variable elements directly linked to work, such as commission, then holiday pay should be paid on the basis that a worker receives pay that is comparable to their normal pay. This case is therefore likely to apply not only where an employee receives a basic salary and commission but also where an employee receives other regular payments for the work they undertake, for example, overtime payments.

This is a huge change from what was generally understood to be the correct way to calculate holiday pay. To date it has generally been common practice, where an employee receives variable payments in addition to a basic salary, for an employer to calculate holiday based only on basic salary. The ECJ‘s view was, however, that this practice is likely to dissuade employees from taking holiday as they are likely to suffer financial hardship. The ECJ held that this was contrary to the purpose of the Working Time Directive and as such in these circumstances holiday pay should be calculated on the basis that the commission payments that an employee would normally receive are also included.

Unfortunately, the ECJ did not confirm how employers should go about factoring these types of payments into an employee’s holiday pay or how the payments should be calculated. The matter has been referred back to Leicester Employment Tribunal for it to consider how holiday pay should be calculated in these circumstances. The ECJ however suggested that, in considering how holiday pay should be calculated in these circumstances, the tribunal should focus on the average commission earned "over a reference period which is considered to be representative, under national law" but gave no further guidance on the matter.

An added complication of this ruling is that the ECJ’s decision relates only to the Working Time Directive. Under the Working Time Directive employees are entitled to 5 weeks’ holiday. Of course, under the Working Time Regulations, the legislation that implements the Working Time Directive in the UK, the statutory minimum holiday entitlement is 5.6 weeks. It is therefore unclear at this stage whether the requirement to include commission payments within holiday pay will apply only to the statutory minimum holiday under the Working Time Directive or where it will apply to the statutory minimum under the Working Time Regulations – this is another issue that Leicester Employment Tribunal shall have to consider. We shall therefore have to wait for a while before we know for certain what employers are required to do to ensure that the way in which they calculate holiday complies with the necessary principles.

It is however important to note that if you have employees that receive commission or other variable payments as part of their remuneration and their holiday pay is currently calculated on the basis of their basic salary only – which is quite often the case – it is likely that going forward these practices shall need to be reviewed to ensure that any commission payments etc are factored into an employee’s holiday pay. However, at the moment it is very unclear as to what exactly employers will be required to do to put these principles in place and how it will work in practice.

For more information, please contact Gemma Hill on 01604 463309 or click here to email Gemma.

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