The ever expanding interpretation of “holiday pay”

On Wednesday 22nd May 2014, the European Court of Justice (ECJ) further expanded the interpretation of holiday pay, which has been becoming ever wider in the past few years. Milton Keynes employment solicitor Maria Gallucci explains more. 

Under the Working Time Regulations, every worker has the right to paid annual leave of at least 5.6 weeks (including bank holidays). These rights come from the European Working Time Directive. The purpose of the Directive is to protect the safety and health of workers by ensuring that they take adequate rest from their work. The Directive states that during the annual leave period the worker is entitled to their normal or average remuneration.

This seems quite straightforward and it is when a worker is only entitled to a basic salary, but what about when a worker’s pay consists of a basic salary plus variable elements directly linked to work, such as commission? Is the worker entitled to be paid this commission during his annual leave period even though he is not working and generating commission?

The ECJ has decided in the case of Lock v British Gas Trading that where the commission is directly linked to work, i.e. there is an intrinsic link between commission earned and the performance of the tasks by the worker, commission must be taken into account in the calculation of the worker’s holiday pay.

In this case, Mr Lock was employed by British Gas as a Sales Consultant. His salary consisted of a basic salary and commission calculated on the basis of the sales he made. When he went on annual leave he did not make new sales and thus did not earn commission, albeit that this did not affect his salary at the time he took the holiday but in the weeks and months afterwards, when the commission fell due to be paid.

He brought a claim on the basis that his holiday pay should include commission. British Gas argued that Mr Lock did receive his normal remuneration during his holiday period as he received commissions that he had earned in the weeks and months before his holiday. The ECJ rejected this argument and took the view that Mr Lock still incurred a financial disadvantage albeit deferred and more importantly, this financial disadvantage could deter him from exercising his right to annual leave. Thus they decided that Mr Lock’s holiday pay should include his commission.

Only 3 years ago we had the case of Williams v British Airways, where another reference was made to the ECJ asking whether allowances paid to pilots should be included in their holiday pay. In that case the ECJ decided that pay during leave should be comparable to pay during periods of work and that as the pilot’s flying allowances were intrinsic to the performance of the job, they should be included in their holiday.

Although it is now clear that commissions should be taken into account when calculating holiday, exactly how this should be calculated is still unclear. The ECJ guidance was that it must determined in such a way as to correspond to the normal remuneration received by the worker and that it is for the national court or tribunal to assess the methods of calculation. Some have suggested that it should be calculated over an average period of x weeks before the holiday is taken but what if commissions are paid months later? Will employees seek to take holiday just after receipt of a big commission so that their holiday pay is maximised?

It is likely that the whatever decision is reached at Tribunal level it will be appealed until we have a judgment at a suitably high binding level but in the meantime, employers who pay commission or other types of allowances are advised to review their contractual leave provisions and how they calculate holiday pay.

If you would like further advice on calculating holiday pay, or any other employment issues please do not hesitate to get in touch. You can contact Maria Gallucci on 01908 202150.