How much is your holiday pay worth?

Summer’s approaching, which is a popular time for many to use a substantial portion of their annual leave. It therefore seems timely to discuss a recent decision from the Court of Justice of the European Union (“CJEU”) regarding holiday pay.

Should commission be taken into account when calculating the worker’s statutory holiday pay? This was the question asked in Lock v British Gas Trading Company.

Mr Lock has been employed by British Gas as an Internal Energy Sales Consultant since 2010, his task being to persuade business customers to buy his employer’s energy products. His remuneration consisted of two main components: his basic salary and commission. His commission, on average, amounted to approximately 60% of his monthly pay and was calculated on the basis of the sales he made. It was not paid at the time of the sales but several weeks after conclusion of the contract between British Gas and the customer.

Between 19 December 2011 and 3 January 2012, Mr Lock took annual leave and was paid his basic salary as well as commission earned over the previous weeks. Having not worked over the period of annual leave, Mr Lock did not make any new sales and subsequently failed to generate any commission. His salary during the months following his annual leave was therefore adversely affected and he sought payment for this by bringing a claim in the Employment Tribunal.

Under these circumstances, the Employment Tribunal asked the CJEU whether the commission which a worker would have earned during his annual leave must be taken into account in the calculation of his holiday pay and, if so, how the sum payable to the worker must be calculated.

The CJEU responded with a preliminary ruling on 22 May 2014, stating that during annual leave, a worker must receive his “normal remuneration”. It further stated: “The purpose of holiday pay is to put the worker, during that period of rest, in a situation which is, as regards his salary, comparable to periods of work.”

The CJEU had taken note that British Gas had conceded at the hearing that the worker does not generate any commission during the period they take annual leave.  The CJEU felt that the adverse financial impact this generates was likely to deter the worker from actually taking annual leave.  This was held to be contrary to the objective pursued by the Working Time Directive (WTD), which provides that workers have the right to at least four weeks’ paid annual leave.  The WTD is implemented into UK law by the Working Time Regulations (WTR) which sets out that most workers in the UK have the right to 5.6 weeks paid annual leave.  Now, the CJEU is saying that this leave should include an element to cover commission a worker would normally earn.

The CJEU did not clarify how the holiday should be calculated and referred the matter back to the Employment Tribunal for this purpose.  Commentators have speculated that the likely approach will be to average a previous month’s commission to determine an appropriate holiday pay.

This ruling extends the principle already established in the case of Williams v British Airways, that remuneration paid in respect of annual leave should be “normal remuneration” received by the worker.

This case is important, particularly for individuals who are paid commission intrinsically linked to the actual work they are carrying out.  There may even be the potential to claim lost payments in previous years, although I suspect this will depend heavily on how the Tribunal determines this pay should be calculated.  For instance, it could be that the commission is simply adjusted so that its payment is spread over the whole year, allowing for periods of annual leave.  Alternatively, it could potentially lead to a minor windfall for some.  Employers will no doubt be reviewing their commission policies to establish which additional payments should be included in their holiday pay and whether the payment of commission will need to be varied to take account of this ruling.

On this basis, the Employment Tribunal’s response will be of major interest.

Damian Brooks, Employment Solicitor