Historically many employers have not accounted for commission when calculating holiday pay. A recent decision has significant implications for such employers.
Article 7 of the Working Time Directive provides that member states must ensure that workers have the right to at least 4 weeks paid annual leave. It does not specify how that statutory holiday pay should be calculated.
The Working Time Directive is implemented into UK legislation by the Working Time Regulations 1998 (WTR). This states that workers are entitled to be paid statutory holiday at the rate of a week’s pay for each week of leave calculated in accordance with sections 221-224 of the Employment Rights Act 1996 (ERA).
In the case of Evans v Malley Organisation Ltd t/a First Business Support it was held that workers who earn a basic salary plus commission are only entitled to holiday pay based on their basic salary.
In the case of Williams and others v British Airways plc the ECJ held that Article 7 of the Working Time Directive requires workers to receive their “normal remuneration” while on holiday. Therefore any payments “intrinsically linked” to the performance of the workers tasks form part of that normal remuneration i.e. where a worker receives basic salary plus commission, this would form a workers “normal remuneration”.
The decisions reached in the cases of Evans and Williams are therefore conflicting.This conflict was looked at by the ECJ in the recent case of Lock v British Gas Trading Ltd.
Mr Lock works as an energy sales consultant for British Gas Trading Ltd. He receives a basic salary plus commission on the sales that he achieves. The commission he receives makes up approximately 60% of his remuneration.
The ECJ has held that where a worker’s remuneration includes contractual commission which is determined by reference to sales achieved, the Working Time Directive precludes national law that calculates statutory holiday pay based on basic salary alone.
The ECJ found that the purpose of holiday pay is to put a worker in the position they would have been in had they been at work. This should include pay which is “linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment.” If variable pay/commission was not included, and consequently workers were paid significantly less during annual leave, this could deter employees from actually taking their annual leave as they would be placed at a financial disadvantage. This would be contrary to the Directive’s purpose.
While the decision by the ECJ makes it clear that commission should be included when calculating holiday pay it states that the method of calculation should be determined by national law.
The case will now return to the Tribunal for it to consider whether the WTR, and in turn, the week’s pay provisions in the ERA, can be interpreted in line with the ECJ’s decision and, if it can, the level of holiday pay to which Mr Lock was entitled.
We therefore need to wait and see what the Tribunal decides.
This decisionmay have significant financial implications for employers as it is not only relevant to cases involving commission, but based on the decision that workers should receive their “normal remuneration” during statutory holiday, it raises the question in respect of the treatment of overtime.
There are two cases scheduled to be heard by the EAT at the end of July (Neal v Freightliner Ltd and Fulton and another v Bear Scotland Ltd) in which the issue of overtime and “normal remuneration” will be looked at.
It is therefore a case of “watch this space” as we will update you on the decisions in these various cases once they are reported.