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24th December 2013

Holiday pay should include commission payments

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Under the Working Time Directive, workers are entitled to paid annual leave.

The Directive does not, however, specify how holiday pay should be calculated; that is left to national legislation.

In the UK, the Directive is implemented by the Working Time Regulations. In accordance with the Directive, under the Working Time Regulations workers are entitled to be paid at the rate of a week’s pay for each week of annual leave and a week’s pay is calculated in accordance with the Employment Rights Act.

Over the years there have been various cases which have considered how a worker’s pay should be calculated when their pay fluctuates and in particular where a worker’s pay consists of various different elements, for example, basic pay and commission.

It had previously been thought that where a worker received a basic salary and commission payments as part of their remuneration, only the basic salary had to be paid to the worker during any period of annual leave. However, in the recent case of Locke v British Gas Trading Limited and Others, the Advocate General of the European Court of Justice gave his opinion that commission payments should be taken into account when calculating the salary to be paid during holiday.

In this case, Mr Locke was a sales consultant for British Gas. He was paid a basic salary together with commission based on the sales he achieved. Due to the commission element of his pay, Mr Locke’s salary fluctuated from month to month, but on average his commission made up 60% of his salary.

When Mr Locke took annual leave during Christmas 2011, he was not able to earn any commission. British Gas, therefore, only paid Mr Locke his basic salary during the annual leave period. As a result, Mr Locke’s salary was much lower during his holiday. Mr Locke made a claim to the Employment Tribunal for outstanding holiday pay.

The Employment Tribunal made a reference to the European Court of Justice for it to consider whether the Working Time Directive required commission to be included within holiday pay and, if so, the appropriate basis for calculating the appropriate pay during annual leave.

The Advocate General of the European Court of Justice has considered the issue and his opinion is that commission should be included within a worker’s holiday pay. The purpose of leave is to allow a worker to enjoy a period of relaxation and leisure and the Advocate General’s view was, therefore, that sufficient holiday pay is required under the Working Time Directive to enable a worker to take and enjoy such leave. By not including commission payments within holiday pay, employees are likely to be deterred from taking the paid annual leave to which they are entitled as they will suffer financial hardship.

The Advocate General also considered the case of British Airways Plc v Williams which held that where remuneration comprises a number of components, any aspect of the remuneration which relates to the performance of tasks that the worker is required to carry out must be taken into account when calculating holiday pay. In this case, the commission was intrinsically linked to Mr Locke’s role as a sales consultant and should therefore have been included within his payment for paid holiday.

In terms of how holiday pay should be calculated when commission is part of a worker’s remuneration, the Advocate General's view was that this was for the national court to determine. He stated, however, that in this case, it would not be sufficient for Mr Lock just to be paid his basic salary plus the commission that fell due during the annual leave. The Advocate General’s view was that Mr Locke should also be compensated for the fact that he would be unable to make sales and therefore earn commission while on annual leave. The Advocate General suggested therefore that in calculating the holiday pay to be paid, taking the average amount received by the worker over a certain period, for example, the previous 12 months, would be appropriate.

This is only the Advocate General's opinion and so his views are not binding on the European Court of Justice. This case and therefore the issue of whether commission should be included in holiday pay is still to be considered by the European Court. However, if the European Court does follow this opinion, this is likely to have a great affect on employers and workers going forward.

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