Does commission count towards holiday pay?

Now that we are in the summer holiday season, the correct way to calculate holiday pay is an immediate concern for all employers.

Recently, the Leicester Employment Tribunal referred the decision in Lock v British Gas to the Court of Justice of the European Union (CJEU). This has raised questions about how to calculate holiday pay and, in particular, whether commission should be taken into account.

In Lock, the CJEU held that  where a worker’s remuneration includes contractual commission based on sales achieved, the Working Time Directive overrules any national law that calculates statutory holiday pay based on basic salary alone.   The justification for this decision is that if commission payments are not taken into account by the employer, the worker will be placed at a financial disadvantage when taking statutory annual leave;   taking holiday prevents him or her from generating commission.  In such circumstances, the worker might be deterred from exercising the right to annual leave. 

The objectives behind the decision are laudable but it leaves a number of questions for employers:

• Over what period should the commission element of holiday pay be calculated?  Should employers use the 12 week reference period, which will be beneficial to those workers who take holiday shortly after receiving commission payments. Or should they use the longer period of a year which has been suggested by the Advocate- General?  The latter may result in a fairer outcome for employers.
• If a 12 week reference period is appropriate, will employers use their right to refuse requests for annual leave to prevent “windfall holiday payments”?  
• Will employers decide to calculate holiday pay using both commission and basic pay only for the statutory minimum holiday period and ignore commission when calculating contractual holiday pay?

The Lock case is now due to return to the Leicester Tribunal which is to consider whether UK domestic legislation can be interpreted in line with the CJEU’s decision and, if it can, the level of holiday pay to which Mr Lock was entitled.   The case is unlikely to be heard before the end of 2014 and there may be an appeal to the Employment Appeal Tribunal after that.

We will keep you updated with the progress of this case.   In the meantime, employers may decide that the best course of action is to wait until the outcome of the Lock decision before finalising any revised arrangements for calculating holiday pay.

For any questions about this issue, please email Helen Farr or your usual Fox Williams contact.