European Court says commission should be included in holiday pay

23rd May 2014

The European Court of Justice (ECJ) has passed a new ruling that insists businesses must include commission in holiday pay where an employee’s regular salary includes commission.
The ECJ ruled that, where such a worker is paid commission calculated on the basis of the sales that they make, that commission must also be included in the calculation of their holiday pay.
The decision is expected to send shockwaves among employers regarding remuneration strategies – including which additional payments that would form part of a worker’s salary should be included in holiday pay.
In a case between British Gas and employee, Mr Lock, who worked as an Internal Energy Sales Consultant, British Gas conceded that the worker did not generate any commission during the period of his annual leave and consequently, in the period following his annual leave, Mr Lock was only paid his basic salary.
Mr Lock was on paid annual leave from 19th December 2011 to 3rd January 2012. Having not worked during his annual leave, Mr Lock did not secure any new sales and subsequently did not generate any commission.
As this had an adverse effect on Mr Lock’s salary during the months following his annual leave, he opted to take action before the Employment Tribunal in order to claim the remainder of his holiday pay to which he felt he was entitled to.
With regards how to calculate the amount of commission payable during annual leave, the ECJ ruled that holiday pay must, in principle, be determined in such a way as to correspond to the normal remuneration received by the worker.
Ralph Nathan, director of employment law at British Gas, says the firm is considering redesigning future employee incentive schemes as a result of the ruling.
“Many of our people receive commission as part of doing their job, so we’re reviewing in detail the CJU judgement,” said Nathan.
“However, we’ll need to await the outcome of the UK Employment Tribunal’s decision to understand the precise impact of this European judgment on UK legislation.
“We’re already examining the issue raised by the Lock case as part of a wider review of employee incentives, and working with trade union representatives to help us design our future employee incentive schemes.”
Nicola Rabson, employment partner at Linklaters, fears employees will now be able to take annual leave at financially advantageous periods of the calendar year.
“Holiday pay should be straightforward to calculate, but employers will now be faced with even more complicated and costly holiday pay calculations, in what is already a minefield,” said Rabson.
“As a result of this decision, it’s possible that employees may be able to gain a significant financial advantage by taking holiday after a particularly lucrative period.”

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