Commission on holiday pay?

In addition to current legislation, several recent court judgments should be considered when calculating holiday pay.
This means that the rules employers should follow when it comes to calculating holiday pay may need to be updated, in particular with regards to commission being factored in to statutory holiday pay calculations.

Commission is usually an amount of money a worker receives as a result of making sales and can make up some or all of their earnings.

Commission must be factored into holiday payments for the 4 weeks of statutory annual leave required under European law. There is no requirement to do this for the additional 1.6 weeks of statutory annual leave provided under UK law, or for any additional contractual annual leave allowance. This was confirmed on the 22nd May 2014 when the European Court of Justice heard the case of Lock v British Gas Trading Ltd.

A summary of the case
In the case of Lock v British Gas Trading Limited, Mr Lock (a sales consultant for British Gas) received a basic salary plus commission on the sales that he achieved.  The commission was a significant element of his overall pay at 60%.

During his leave, Mr Lock was paid his basic salary plus the commission from previous sales that fell due during the period. However, he did not receive commission for the period during which he was on leave and would therefore lose income in the future by taking leave.

The European Court of Justice firstly considered whether Member States of the EU must take measures to ensure that a workers holiday pay accounts for commission payments and secondly how such holiday pay would be calculated. In answering the first question, the Court held that Mr Lock’s commission was ‘intrinsically linked’ to the performance of the tasks required under his contract and therefore his statutory holiday pay should include an amount to reflect the commission he would have earned had he not taken leave. However, the court did not provide any specific guidance on how holiday pay should be calculated and this will need to be determined by national courts or tribunals within particular member countries.

The Lock v British Gas Trading Ltd case was referred back to the UK Employment Tribunal to consider how commission is calculated into holiday pay for that particular case. A preliminary hearing was held in February 2015 questioning whether the Working Time Regulations themselves could be read in line with the European judgment. The Employment Tribunal judgment, which was also confirmed by the Employment Appeal Tribunal on 22nd February 2016, said that it could be. However, this ruling may still be subject to a further appeal.

This means that at present, there is no definitive legal answer about how such holiday pay calculations must be made or how and indeed if claims can be backdated. We will have to wait to see how UK courts and tribunals interpret this and other decisions to establish the full implications for employers and employees alike, however it is likely that significant change will result.

We will be watching this decision with interest in the coming weeks and months. But in the meantime we can help you review shift patterns and leave arrangements to establish if changes need to be made to contracts to mitigate any historic or future risk for your organisation.