The Court of Justice of the European Union (CJEU) has held that the Working Holiday Directive should require commission to be taken into account when calculating holiday pay.
The finding in Lock v British Gas Trading Limited and others follows the Advocate General’s opinion in the case in December 2013.
It means that employees who are paid wholly or partly by commission will be entitled to have this reflected in their holiday pay.
Article 7 of the Working Time Directive provides that every employee has the right to paid annual leave. The directive is implemented into UK law by the Working Time Regulations 1998, which provide that an employee is entitled to be paid during statutory annual leave at a rate of a week’s pay for each week of leave.
Lock, a sales consultant at British Gas, was paid commission on a monthly basis. On average, commission made up about 60% of his pay. When he took annual leave he did not generate any commission and, when calculating his holiday pay, his employer took only his basic pay into account.
Lock brought an employment tribunal claim for outstanding holiday pay. The tribunal then made a reference to the CJEU asking if the Working Time Directive requires commission to be included in holiday pay.
The CJEU considered the case of British Airways plc v Williams and others in which the CJEU considered the concept of ‘normal remuneration’. British Airways involved holiday pay under the Aviation Directive, but the CJEU proceeded on the basis that the same principles applied under this as applied under the Working Time Directive.
It concluded that the calculation of average pay for the purposes of determining the amount of holiday pay owed must take account of supplements usually due to a worker as a result of his remuneration.
The CJEU has held, following the British Airways case, that because commission is intrinsically linked to the performance of the tasks the employee is required to carry out under his contract of employment, it must be taken into account in calculating holiday pay.
The CJEU also held that the commission was directly linked to the work Lock normally carried out and, although it fluctuated from month to month, such commission was permanent enough for it to be regarded as forming part of his normal monthly remuneration.
Rebecca McGuirk, employment partner at law firm Trowers and Hamlins, said: “Following the decision, it’s clear that the holiday pay rules under the Working Time Regulations (a week’s pay for a week’s leave) do not accord with the directive.
“As long as there is an intrinsic link between the various components making up the total remuneration of the worker and the performance of the tasks he is required to carry out under his contract of employment, then these components must be included in any holiday pay calculation.”
Nicola Rabson, employment partner at Linklaters, added: “Holiday pay should be straightforward to calculate, but employers will now be faced with even more complicated and costly holiday pay calculations, in what is already a minefield.
“As a result of this decision, it’s possible that employees may be able to gain a significant financial advantage by taking holiday after a particularly lucrative period.”
Ralph Nathan, director of employment law at British Gas, said: “Many of our people receive commission as part of doing their job, so we’re reviewing in detail the CJEU judgement.
“However, we’ll need to await the outcome of the UK Employment Tribunal’s decision to understand the precise impact of this European judgment on UK legislation.
“We’re already examining the issue raised by the Lock case as part of a wider review of employee incentives, and working with trade union representatives to help us design our future employee incentive schemes.”