Holiday pay should include commission, says EU
A recent legal opinion from the European court could have huge implications for UK employers whose staff receive commission payments.
According to an opinion of an advocate general of the Court of Justice of the European Union (CJEU) on a recent case [Lock v British Gas Trading], holiday pay should include an amount that reflects average commission previously earned by workers over a prior period of months. This decision will be of major importance to employers.
Under the Working Time Regulations 1998, workers have a right to paid annual leave. The idea is to put the worker in a comparable financial position to being at work. However, so far holiday pay in the UK has not been required to include any element of commission that would have been earned by workers had they not taken holiday.
In this particular case, the employee was a sales consultant at British Gas Trading. He earned commission, paid monthly, on top of his basic pay. The commission fluctuated but came to about 60% of his total salary. At the end of December 2011 he took two weeks' paid annual leave. During this leave period, his remuneration consisted of his basic pay and commission he had earned during the previous weeks. However, in the months after his annual leave, his pay was reduced which had been caused by him being unable to generate commission while he was on holiday.
He brought a claim for outstanding holiday pay that he felt he was due. The employment tribunal referred the case to the European Court of Justice for a preliminary ruling on whether commission should be included as part of a holiday pay calculation and, if so, how the amount of commission should be calculated.
The Advocate General who reviewed this case concluded that the employee needed to be compensated for not being able to make sales and earn commission during his leave. Part of his justification for this approach was that holiday entitlement was intended to give workers rest and relaxation and they should not be deterred from taking it. The employee’s commission was directly linked to the work normally carried out by him. While the amount of commission he earned fluctuated from month to month, it was permanent enough for him to regard it as forming part of his normal pay, described in the opinion as a “constant component of his remuneration”.
The employer’s defence was that the amount of commission paid already took into account the fact that workers wouldn’t be able to generate commission during their leave. But this argument was rejected. According to the EU opinion, commission should be included as part of a worker’s remuneration when calculating what that worker should receive as holiday pay. The advocate general suggested taking the average of the commission received by the worker over a representative period of, for example, the previous 12 months, in order to calculate the amount of commission payable. How this will work in practice remains to be seen.
However, it should be noted that an Advocate General’s opinion is not binding on the CJEU. But, if the court follows the opinion when it hears the case next year, the decision will set a binding precedent requiring employers to include commission when calculating a worker’s holiday pay. The implications of this case are huge and are an extension of the ruling in another case brought against British Airways, where the European Court decided that payments “intrinsically linked” to an employee's job should be included in the calculation of holiday pay (in that case it was payment for flying hours).
If you pay your employees commission, you need to consider now what your potential exposure is to challenges of this sort, given that claims could be backward as well as forward looking. You need to think about whether it is worth changing commission structures, and whether you have the software necessary to calculate holiday pay if it includes average commission. In the meantime, watch this space…
Posted on 19 Nov 2016