The long awaited decision of the Court of Justice of the European Union ("CJEU") in British Gas v Lock confirms that commission must be included when calculating holiday pay, although this is unlikely to bring much comfort to businesses.
What the law says
Under Regulation 16 of the Working Time Regulations 1998 ("WTR"), a worker is entitled to be paid during statutory annual leave at a rate of a week's pay for each week of leave, calculated in accordance with sections 221 to 224 of the Employment Rights Act 1996.
If the worker has normal working hours but their pay varies they are entitled to holiday pay based on their average pay during those normal working hours over the previous 12 working weeks. Until recently, only payments due under the employment contract for normal working hours were taken into account for these purposes.
However, at the end of last year, Advocate-General Bot, giving his opinion in the case of British Gas v Lock, stated that the Working Time Directive ("Directive"), from which we get our WTR, requires commission to be taken into account where this is directly linked to the work carried out under the employment contract. The CJEU has now decided to follow the Advocate-General's opinion.
Brief details of case
Mr Lock is a sales consultant for British Gas receiving a basic salary and variable commission on a monthly basis. His commission makes up about 60% of his pay. The amount of commission varies depending on the number and type of sales he achieves, paid at the time the sales contract is entered into and not when Mr Lock actually carries out the work to achieve the sale.
Mr Lock took holiday from 19 December 2011 to 3 January 2012 during which time he was paid basic pay and the commission he had earned on sales contracts entered into in the previous weeks. However, as he did no work during his holiday, he did not generate any sales and therefore his salary was lower in the months following him taking holiday as he received no commission, and therefore he "lost" income by taking his holiday. Mr Lock brought a claim for his "lost" holiday pay in the Employment Tribunal. The question of whether commission should be included in holiday pay and, if so, how this should be calculated, was referred to the Court of Justice of the European Union ("CJEU") by the Employment Tribunal.
The CJEU has now confirmed that the holiday pay required under the Directive is to enable a worker to actually take the leave to which he is entitled, and that commission such as that received by Mr Lock should be included in the calculation of holiday pay, since it is directly linked to the work he normally carries out. Although the amount of Mr Lock's commission varies on a monthly basis, it is nevertheless permanent enough to be regarded as part of his normal monthly pay. However, the Court has left it to Member States to decide on how that holiday pay should be calculated.
What happens now?
Businesses should review their holiday policies in light of this decision to consider whether any amendments are required in order to ensure workers are not deterred from taking leave. It is advisable that workers who are paid wholly or partly by commission (or indeed any other variable payment linked to their normal work) have that entitlement reflected in their holiday pay, at least in respect of the 4 weeks leave entitlement provided for under the Directive. However, how this is actually to be calculated in practice remains open to debate and will leave businesses struggling with what are already complex and costly rules around holiday pay.