HM Insights

Holiday pay entitlement includes commission

What does a week's pay mean for employees who are on annual leave? Employers who regard a week's pay only as basic salary should take heed of the decision of the European Court of Justice ("ECJ") in the case of ZJR Lock v British Gas Trading Limited.

This case concerned the interpretation of the Working Time Regulations 1998 (which implement a European Directive) and, in particular, Regulation 16, which deals with payment in respects of periods of leave. Regulation 16 provides that a worker is entitled to be paid "a week's pay" in respect of each week of leave. In essence, the question before the ECJ was how this – seemingly straightforward – entitlement should be calculated.

Mr Lock was, and is, a sales consultant with British Gas. He is in receipt of a basic salary of £1,222.50 per month. Above this, he earns commission with reference to the level of sales achieved by him. This averaged out, in 2011, as £1,912.67 per month, meaning roughly 60% of his earnings came from commission payments.

During a period of annual leave, Mr Lock was not able to make sales and so could not earn commission. He was paid only his basic salary in respect of his period of annual leave. In light of this, in relation to a period of annual leave from 19 December 2011 to 3 January 2012, Mr Lock raised an employment tribunal claim in respect of outstanding holiday pay, arguing that his payment should reflect his commission earnings, not only his basic salary.

The case was referred to the ECJ by the employment tribunal, asking whether if Mr Lock's average pay over the year having taken annual leave was less than it would have if he had not taken annual leave (on the basis that he would be earning commission if he had not decided to take his leave entitlement), was this compliant with the European Directive?

It is important to note the origin of the European Directive regarding the right to paid annual leave is intended as a health and safety measure, in order that there is no deterrent to employees to take their leave entitlement. The ECJ viewed that the commission received by Mr Lock was directly linked to his work and there was an intrinsic link between it and the performance of the tasks required to be carried out under his contract of employment.

As such, it held that such commission must be taken into account when calculating the remuneration a worker is entitled to in respect of his annual leave.

British Gas tried to argue that Mr Lock received payment of commission he had previously earned during his period of annual leave, so there was no deterrent to him taking it. However, the ECJ ruled that as Mr Lock could not actually earn commission during this period, he was deterred from taking annual leave, as it affected his earnings over the period of annual leave as a whole.

This means that any UK legislation preventing this entitlement is unlawful and the Working Time Regulations must be attempted to be read in compliance with this judgment. The case is now returned to the tribunal in order to ascertain whether this is possible, and how the entitlement to payment should be calculated.

Whilst the ECJ's decision does not have direct effect for private sector employers, meaning it is not directly applicable until the tribunal either decides that the existing legislation can be read in compliance with the judgment or the UK government legislate to give effect to the ECJ's decision, this is a highly significant – and potentially expensive – judgment for employers. Failure to pay annual leave at a rate including commission will leave employers open to challenges from employees, therefore we recommend employers immediately review their practices and put in places measures to comply with this judgment. It should be noted that this entitlement relates only to statutory annual leave, and not any purely contractual leave over and above statutory entitlement.

Whilst this case deals only with commission payments, this is not the end of the story. There are cases to be heard before the Employment Appeal Tribunal this summer which concern whether regular overtime payments should be taken into account as part of the calculation of a week's pay. In light of this, employers should also consider whether bonus payments can also fall into this category. This is, then, a case that cannot be ignored by any employer.

For full details about how this decision may affect you and your business, please contact one of the Harper Macleod employment team who will be happy to assist.