Statutory holiday pay must include commission
22 May 2014
The European Court of Justice (ECJ) has ruled that under the Working Time Directive a worker’s statutory holiday pay must not be limited to basic salary where commission is a part of remuneration.
Under the Working Time Directive, workers are entitled to paid annual leave. However the Directive does not specify how holiday pay should be calculated, this is left to national legislation to determine. The Directive is applied to UK law by the Working Time Regulations which stipulate that a worker is entitled to be paid during statutory annual leave at a rate of a week's pay for each week of leave.
In this case British Gas v Lock, Lock was a salesman on a basic salary with variable commission paid in arrears. His commission depended not on the time worked, but the outcome of that work, in the sales he achieved. When Mr Locke took annual leave in 2011, he was not able to earn any commission so British Gas only paid him his basic salary for the leave period. So Lock brought a claim to the employment tribunal for his low holiday pay.
Daniel Barnett’s employment law bulletin summarises that the employment tribunal made a reference to the ECJ to ask, broadly, if in calculating holiday pay, Member States must take measures to ensure that a worker taking leave is paid by reference to commission payments that the worker would have earned if at work, and, if so, how to work out that holiday pay.
The ECJ answered 'yes' to the first question, but left the calculation as a matter for the national courts to decide on the basis of the rules and criteria set out in the ECJ's case law on paid leave, and in light of the objective of the directive, to ensure that workers take paid leave.
The case reaffirms the principle that where a worker's pay consists of a basic salary and variable elements directly linked to work, then holiday pay should be paid on the basis that a worker receives pay comparable to normal pay whilst on holiday, and is not deterred from taking leave by financial considerations, cf. the pilots' case, Williams v British Airways.
The case leaves open the question of how best to ensure that the objectives of the directive are met, but did not consider whether employers might require workers to take their full entitlement to leave, thereby ensuring that they are not 'deterred' from taking leave, and it may be that some form of 'rolling-up' of commission on an averaging basis might be the best way forward.
Practitioners may wish to consider advising clients to review their contractual leave arrangements with a view to ensuring that commission or other relevant variable payments are factored into holiday pay due under the Directive. Any amendments to the Working Time Regulations to implement the effect of this judgment may take some time.