Our thoughts on the world of employment law - and beyond.

Holiday Pay update

The European Court of Justice handed down its judgment earlier today in the case of Lock v British Gas Trading Limited.  Affirming the Advocate General's opinion, it concluded that where a worker is paid commission which is calculated on the basis of the sales that they make, that commission should also be included in the calculation of their holiday pay.  The key reasoning behind the judgment is to ensure that workers are not discouraged from taking their annual leave entitlement for financial reasons.

By way of brief background, Mr Lock is a sales consultant for British Gas and he is responsible for selling energy products to business clients.  His remuneration comprises two elements: his basic salary and commission.  The commission payable is calculated on the number of sales achieved and is therefore variable.  Mr Lock is paid both his basic salary and commission monthly.  However, the commission is paid in arrears following the conclusion of the sales contracts.

Mr Lock took some time off during the Christmas period in 2011.  During the period that he was on holiday, he was paid his usual basic salary and commission for sales that he had made in the preceding period.  However, he noted that as he did not work during his holiday (and therefore made no sales), his remuneration in the months following his holiday were adversely affected.  He received only basic pay as he had not generated any commission during his holiday.  As such he brought a claim for outstanding holiday pay. 

Article 7 of the Working Time Directive entitles workers to paid annual leave.  However, it is left to domestic legislation to determine how such pay should be calculated.  In the UK, under the Working Time Regulations, workers are entitled to paid annual leave at a rate of a week's pay (calculated in accordance with the Employment Rights Act 1996).        

Mr Lock's case was stayed by the Employment Tribunal and a reference made to the ECJ.  The reference related to the question of whether, in a situation such as Mr Lock's, Article 7 of the Working Time Directive requires that Member States take measures to ensure that a worker is paid in respect of periods of annual leave by reference to the commission payments he would have earned during that period, had he not taken leave, as well as his basic pay.

In its judgment, the Court noted that the purpose of holiday pay is to put the worker (during his holiday) in a situation which is, as regards his salary, comparable to periods of work.  British Gas argued that during the period of his leave, Mr Lock did receive a sum comparable to that which he would have received had he been at work: as he was paid both his basic salary and commission for previous sales.  The Court did not accept this argument.  As Mr Lock did not work during his holiday and earned no commission he suffered a deferred financial disadvantage - following the period of his leave - and this might deter him from taking annual leave (particularly given that in this case approximately 60% of his remuneration comprised commission).

In terms of the calculation of holiday pay, the Court noted that whilst it should in principle correspond to the normal remuneration received by the employee where such remuneration comprises several components specific analysis is required to determine that payable.  As Mr Lock's commission is directly linked to the work he does for the employer, his commission must be taken into account in the calculation of his holiday pay.

The Court concluded that the methods of calculating the commission to which a worker, such as Mr Lock, is entitled in respect of his annual leave must be assessed by the national court or tribunal on the basis of the rules and criteria set out in the ECJ's case-law and in the light of the objective pursued by Article 7 of the Working Time Directive.

Employers who operate commission structures which are directly linked to work being done will need to assess how this judgment will affect them.  In particular we would recommend reviewing how you deal with commission and holiday pay and ensure that employees are not adversely affected if they take holiday.  One important point to note when assessing potential exposure is that employees may be able to bring claims for backdated holiday pay (as well as any future claim).  

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