Case law update: Holiday pay must include commission UK law on holidays is out of line with WTD

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The end of basic pay for holidays comes one step closer with the CJEU’s latest decision on holidays

Background

Under current UK law, workers must be paid at the rate of a week’s pay for each week of their statutory minimum holiday. A “week’s pay” is calculated in accordance with detailed provisions in the Employment Rights Act 1996 (ERA). Those provisions operate to exclude some variable components (such as overtime and commission) from the calculation in many situations.

There have been arguments brewing for some time about whether the rules for calculating a “week’s pay” under ERA are out of line with the requirements of the EU Working Time Directive (WTD). The CJEU decision in Lock v British Gas Trading Limited confirms that, at least as far as commission is concerned, those arguments are well founded.

Case facts

Mr Lock was a British Gas Salesman who received basic pay and commission. His commission was paid on a monthly basis, depending upon sales achieved.

When he took holiday, Mr Lock was paid basic pay only in accordance with the rules for calculating a “week’s pay” in ERA.

Mr Lock argued that he was not able to make any new sales or follow up on potential sales during his holiday. He was therefore unable to generate commission. This had an adverse effect on the commission he received in later months. He brought a claim in the employment tribunal arguing that his holiday pay ought to reflect what he would have earned from commission during his holiday.

The employment tribunal referred to the CJEU the question of whether the UK was required to reflect commission in its rules for calculating holiday pay.

CJEU decision

The CJEU ruled yesterday that any national law which excludes commission from holiday pay is out of line with the WTD. The rules for calculating a “week’s pay” under ERA therefore do not comply with the WTD insofar as commission is concerned.

The CJEU based their conclusion on the fact that, because Mr Lock did not generate commission during holiday, in the period following his annual leave he was paid only reduced remuneration comprising basic salary. Reducing a worker’s remuneration in respect of holiday is unlawful, even if the reduction in remuneration occurs after the holiday is taken as this adverse financial impact may deter a worker from taking holiday.

However, the court declined to give a clear answer to a second question referred to it by the employment tribunal in Lock, namely how the UK should therefore go about calculating the commission to which a worker is entitled in respect of his annual leave. Instead, the CJEU said that national courts and tribunals must assess this on the basis of rules and criteria set out in the WTD and related CJEU case law.

The leading CJEU case on holiday pay is Williams v BA, where the CJEU ruled that, under the WTD, workers were entitled to “normal remuneration” for holiday.

Comment

It remains to be seen how UK courts and tribunals will grapple with the problem of how to reflect commission in holiday pay. Must employers calculate the average commission generated in a week and add this to a week’s holiday pay? The employment tribunal in Lock v British Gas will need to consider this question, as the case will now be referred back to it for a decision. We hope for more guidance as the case continues.

It is also unclear whether any commission schemes will escape the impact of this latest CJEU ruling. For example, what if the commission scheme is based on annual targets and the employer takes account of the fact that workers would be taking holidays when setting the targets? Have such workers really lost out on commission by taking their holidays?

Overtime pay is the other key holiday headache at the moment. Many of our member companies are awaiting further court rulings on whether overtime pay should also be factored in to holiday pay. This question is due to be considered by the Employment Appeal Tribunal in Neal v Freightliner later this year. In our view, it is likely that Neal v Freightliner will go against employers and that overtime pay will (in many circumstances) also need to be factored in to holiday pay in future. This seems even more likely in light of the CJEU decision in Lock.

EEF support

We are encouraging members to get to grips with their potential exposure in relation to holiday pay and consider their strategy for dealing with the issue.

To assist, we are running a series of seminars across the country ‘Holiday and Pay – end of the low cost holiday?’.

Some dates are already fully booked, so please act quickly to secure your place.

Find out more and book your place

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