Cost of Holidays to Rise – For Employers

05 Jun

Employers with staff whose remuneration includes an element of commission could be facing a sharp increase in holiday pay following a decision of the Court of Justice of the European Union (“CJEU”) handed down on 22 May.

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Employers with staff whose remuneration includes an element of commission could be facing a sharp increase in holiday pay following a decision of the Court of Justice of the European Union (“CJEU”) handed down on 22 May.

In Lock v British Gas Trading Ltd C-539/12, Leicester Employment Tribunal had asked the CJEU for a preliminary ruling on whether Article 7 of Directive 2003/88/EC (the “Working Time Directive”) required workers to be paid in respect of periods of annual leave by reference to the commission payments they would have earned during that period, had they not taken leave, as well as basic pay.

The question arose because Mr Lock (who was and is employed by British Gas as an Internal Energy Sales Consultant) receives a salary composed of two elements: basic pay and commission, both contractual and both paid monthly. Basic salary is fixed, whereas commission varies according to the sales achieved by Mr Lock in the preceding months. Commission payments account for as much as 60% of his remuneration, and are paid in arrears.

When he took annual leave from 19 December 2011 to 3 January 2012, Mr Lock was paid his basic salary as holiday pay, and also received commission payments from earlier sales. However, since he didn’t make any sales during his annual leave he was unable to generate any future commission in respect of that period. This in turn had an adverse effect on his remuneration level in subsequent months.  Mr Lock decided to bring a claim in the Employment Tribunal for outstanding holiday pay, and proceedings were stayed pending the outcome of the referral to Europe.

The CJEU has now handed down a ruling which is likely to have far-reaching consequences. It confirmed that “the entitlement of every worker to paid annual leave must be regarded as a particularly important principle of European Union social law from which there can be no derogations.” Workers must receive their “normal remuneration” during annual leave and the “purpose for providing payment for that leave is to put the worker, during such leave, in a position which is, as regards his salary, comparable to periods of work.”

British Gas argued that Mr Lock had received a “comparable” salary during his annual leave, since he was paid both basic salary and the previously generated commission. The CJEU rejected this argument, concluding that Mr Lock nonetheless genuinely suffered a deferred financial disadvantage by virtue of having taken his annual leave, because subsequent remuneration would consist only of his basic salary. He would lose out on commission. The resulting reduction was a potential deterrent to the worker from taking his holiday entitlement and was therefore contrary to the objective pursued by Article 7 of the Working Time Directive. (Note, however, that this ruling only applies to the 4 week minimum holiday entitlement derived from the Directive, and not the additional 1.6 weeks provided for in reg. 13A of the Working Time Regulations).

Confirming and building upon its earlier decision in Williams and others v British Airways plc C-155/10, the CJEU reiterated that where there is an intrinsic link between the payment (in this case, commission) received each month and the performance of tasks under the contract of employment, such payment must be taken into account in the calculation of the total remuneration to which a worker is entitled in respect of annual leave. In short, commission (of this kind) must be factored in when calculating holiday pay.

The next question was, of course, how does one calculate the commission payable in respect of the annual leave period? The CJEU has not prescribed a formula, leaving it instead for national courts or tribunals to work out an average “over a reference period which is considered to be representative.” In the Opinion prepared by Advocate-General Bot, a potential reference period of 12 months was proposed. However, when the case returns to Leicester Employment Tribunal, it is probable that the standard 12 week period will be used to calculate a week’s pay, as set out in sections 221-224 of the Employment Rights Act 1996.

The decision in Lock means that employees working on commission may have claims for outstanding holiday pay going back, potentially, to the beginning of their employment or even to the introduction of the Working Time Regulations in 1998 (see, for example, the Neal v Freightliner overtime case which is currently under appeal and due to be heard by the EAT in late July).

Employers should now urgently review contracts and policies for calculating holiday pay to comply with this decision and the Article 7 objectives (and nip potential claims in the bud). Meanwhile, employees who earn commission should get timely advice about what they may be owed – any claim for holiday pay must normally be brought within three months of the most recent underpayment.

Adrian Peck

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