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Holiday Pay and Commission Payments

23rd May 2014
The right to paid holiday is established in the Working Time Regulations 1998. Those regulations cross refer to various sections of the Employment Rights Act 1996 on the method of calculating the amount of pay that an individual should receive during any holiday period. In the majority of cases the calculation is likely to be quite straightforward, because for those that have a set salary the holiday pay shold be the same as their normal salary for the period in question. However, complications can arise when the income received by an individual can vary, say month to month or week to week due to receiving payments by way of bonuses or commissions. This issue, and some of the consequences for an individual that has a varying income actually taking holiday has been the subject of a recent, and important decision of the European Court of Justice.

The case in question, Lock v British Gas Trading Limited, concerns an individual that works as a salesman for British Gas. He receives a basic salary together with variable commission payments- which are paid in arrears. The commission part of his income has on average constituted 60% of his total income. Fairly obviously, when Mr Lock took holiday he could not earn commission. The result of that was that his salary on return from holiday would be lower than normal, at least until the commission payments from subsequent deals were paid (payment of this element was, understandably and logically, paid to him in arrears).

It was accepted that the individual had received holiday pay taking into account the commission payments he had received during the weeks preceding the holiday. Mr Lock, however, brought a claim to the Leicester Employment Tribunal for his "lost" holiday pay after taking leave in December 2011 to January 2012. This claim was on the basis that by taking holiday he had lost income from commission that he could or would have earned had he continued working over that period, albeit the financial loss would not be suffered until after he had returned from holiday. The Employment Tribunal referred the case to the European Court of Justice to determine how the holiday pay should operate and be calculated in such circumstances. The Employment Tribunal therefore asked the European Court to clarify whether such an arrangement. where subsequent income/commission was lower as a consequence of taking holiday, was in breach of the law.

The European Court rejected the argument made by Mr Lock's employer and by the UK Government that the Working Time Regulations were compliant with EU law on this area, as they provided for the pay during a holiday to be calculated taking account of the commission payments that the individual had received in the preceding weeks. In rejecting the argument the European Court expressed the view that the arrangement would deter the individual from actually taking any holiday, because in that holiday he would not be able to earn commission (which amounted to a significant part of his usual monthly income), even though the loss would not have any effect until later.

Frustratingly the European Court refused to give its own opinion on how holiday pay should be calculated to take account of the possible detrimental effect on Mr Lock. The Court simply stated that this is a matter for the UK Government to determine, so that workers in similar situations to Mr Lock are not deterred from actually taking holiday.

This case confirms that holiday pay should be calculated taking into account commission payments earned by the individual over the preceding weeks, plus the individual's normal basic salary. However, it does nothing to help employers provide for a means of calculating holiday pay so that individuals are not deterred from taking holiday because they cannot earn further commission payments in the holiday period.

In practice employers must ensure that commission payments are factored into the calculation of holiday pay. In addition there will need to be some approach adopted in order to ensure that the individual is not deterred from taking holiday in the first place. The practical implications may include taking steps to ensure that workers that earn commission have to take ALL their annual holiday entitlement and that some element of payments they would receive are taken into account in the pay they get AFTER returning from holiday. It is unlikely, with less than one year to go before the next General Election that the Government will give this much attention or be able to amend the Working Time Regulations to address this issue any time soon. In the meantime the Tribunals and Courts are also likely to struggle with this issue in the absence of clear amending regulations. It is clear that in the meantime employers need to address this within their own policies and procedures, in particular in the terms of how and when they make commission payments, and how much they pay as commission.

If you need further assistance on matters raised in this article do not hesitate to contact us at Hallett Employment Law Services Ltd.                
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