Holiday pay now to include commission

Posted: 23/01/2014

Lock v British Gas Trading Limited [2013]

According to an opinion of an Advocate General of the European Court of Justice (ECJ) which will be of major importance to employers, a worker’s holiday pay should include an amount that reflects average commission previously earned over a prior period of months.

Legal issue

Under the Working Time Regulations 1998, a worker has a right to paid annual leave. The purpose of the right is to put the worker in a comparable financial position to being at work. However, until now, holiday pay paid in the UK was not required to include any element of commission that would have been earned by the worker had they not taken holiday.

Facts

Mr Lock is a Sales Consultant at British Gas Trading Limited (British Gas). On top of his basic pay he also earned commission which is paid monthly. Mr Lock’s commission fluctuates but equates to roughly 60% of his total remuneration.

At the end of December 2011 Mr Lock took two weeks' paid annual leave. During this period of leave his remuneration comprised his basic pay and his commission that he had earned during the previous weeks. However, it was in the months following his annual leave that Mr Lock suffered adverse affects from his reduced pay due to the absence of commission generated when he was on holiday.

Mr Lock brought a claim for outstanding holiday pay. The Leicester Trinbunal referred the case to the ECJ for a preliminary ruling as to whether commission should be included as part of any holiday pay calculation and, if so, how the appropriate amount of commission is to be calculated.

Opinion

Advocate General Bot concluded that Mr Lock needed to be compensated for the fact that he would be unable to make sales and earn commission during his leave. This approach ensures his leave is used for rest and relaxation and that he is not deterred from taking his holiday entitlement. The Advocate General clarified that Mr Lock’s commission is directly linked to the work normally carried out by him. Whilst the amount of commission may fluctuate from month to month, it is nonetheless permanent enough for it to be regarded as forming part of his normal pay as it “constitutes a constant component of his remuneration”.

British Gas’ defence that the amount of commission paid already takes into account the fact that worker won’t be able to generate commission during their leave, was rejected.

According to this opinion commission should, therefore, be included as part of a worker’s remuneration when calculating what that worker should receive as holiday pay. The Advocate General suggested taking the average of the commission received by the worker over a representative period of, for example, the previous 12 months, in order to calculate the amount of commission payable.

Comment

An Advocate General’s opinion is not binding on the ECJ. However should the ECJ follow the Advocate General’s opinion when it hears the case next year, it will set a binding precedent that requires employers to include commission when calculating a worker’s holiday pay. The implications of this case are huge and are an extension of the Williams v British Airways case last year where payments 'intrinsically linked' to an employee's job were required to be included in the calculation of holiday pay (in that case it was payment for flying hours).

Employers need to consider now: what is the potential exposure (given that claims could be backward as well as forward looking)? Is it worth changing commission structures?  Do you have the holiday software necessary to calculate holiday pay if it includes average commission?

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