Where a worker's remuneration includes commission, employers must include it when calculating holiday pay. It is not enough to pay basic pay only. If you pay your worker's basic pay and commission, this judgment will affect you. (see Neale v Freightliners Ltd)
The European Court of Justice (ECJ) has followed the guidance of the Advocate Generale in the case of Lock v British Gas and ruled that a worker's statutory holiday pay should not be limited to basic salary where commission is a part of remuneration.
In Lock v British Gas, Mr Lock worked in sales and was paid both a basic salary and variable commission (paid in arrears). Commission was earned when the sale was achieved; however, when Mr Lock was on holiday he could not earn commission and lost income as a result. Mr Lock brought a claim for his 'lost' holiday pay following holiday in December 2011 to January 2012. The questions put to the ECJ were (1) when a worker took holiday should their holiday pay be calculated by reference to commission payments they would have earned if at work, and, (2) if so, how do employers calculate that holiday pay?
Question 1 – Yes – where commission is part of the worker's remuneration package, when they take holiday, holiday pay should include commission the worker would have earned but for taking holiday. Question 2 – was left unanswered! The calculation was left for the national courts to decide having regard to previous case law and also the primary objective of holiday and holiday pay: to ensure that workers take paid leave.
(NB Holiday refers to statutory holiday only, 28 days per annum)
This is undoubtedly an enormous decision for employers who have staff on variable pay – be it commission or, as we saw last year, overtime (see Neale v Freightliners Ltd). Where a worker's pay consists of a basic salary and variable elements directly linked to the work that they do, then holiday pay should be calculated and paid by reference to that pay they would otherwise have received. The rationale is that workers should not be penalised financially for taking holiday.
What should employers be doing now? The 'best' way is to review your payment and contractual arrangements with workers NOW, carry out a risk assessment and take advice. Do you already calculate holiday pay based on an average of basic pay and commission earned in the previous 12 weeks? Are your workers taking their full statutory entitlement to holiday? Do you keep records of holiday taken or holiday pay paid? What is your worst case financially?
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.