It has been confirmed, by the European Court of Justice (ECJ), that basic salary and commission payments should be taken into account when paying a worker statutory holiday pay (British Gas Trading v Lock). This had been the opinion of the Advocate-General earlier last year and will now be reflected in the Working Time Regulations.
This principle will apply to all employees and workers (but not those genuinely self employed) whose salary is made up of fixed and variable amounts, when being paid their statutory annual leave. This is currently 28 days for a full time employee and pro rated for part time employees.
Mr Lock was a salesman who earned variable commission along with his basic salary. His commission was dependent on the outcome of the work (i.e. sales he achieved) and not the hours he worked. Mr Lock was unable to make any sales whilst he was on annual leave. He was therefore ‘worse off’ for taking holiday instead of being at work. He brought a claim in the employment tribunal for his ‘lost’ holiday pay.
There had been conflicting decisions on this legal point and as a result, the employment tribunal was unsure how to proceed. The Advocate-General gave his opinion that commission payments should be included in statutory holiday pay, but the question was referred to the ECJ for a definitive answer.
The ECJ confirmed that where a worker’s pay consists of both basic salary and variable elements directly linked to work, holiday pay should be paid on the basis that a worker receives pay comparable to normal pay whilst on holiday. Essentially, this means that a worker will be paid more while on annual leave, in order to compensate for the fact that they will earn less after a period of annual leave.
Unfortunately, the ECJ failed to comment on how such commission payments should be calculated. It left this as a matter for the national courts to decide. The Advocate-General had previously recommended that the calculation should be the average amount received by a worker over a 12 month period. I would find it surprising if this approach was adopted by the courts, given that the calculation for a week’s pay, is a 12 week reference period.
In summary, employers should consider the holiday pay they give to workers where such workers receive commission or other variable payments. If you require specific advice on this issue, please contact me or one of the team.