Should Holiday Pay include Commission?

The calculation of holiday pay has become somewhat of a hot topic recently, especially in circumstances where a employee’s remuneration levels are variable.

Our last article on the topic can be found here: https://www.imhrplus.com/news/Statutory-Holiday-Pay-Should-Take-Overtime-Into-Account

Article 7 of the Working Time Directive does not specify how holiday pay should be calculated, and in the UK, the Working Time Regulations state that holiday pay is calculated on the basis of a ‘week’s pay for each week of leave’. What amounts to a ‘week’s pay’ however is a separate, and often complicated question.

In Lock v British Gas Trading, the Advocate General was asked how holiday pay should be calculated where an employee receives commission payments on top of their basic salary.

The Advocate General delivered his opinion that, in this case, the remuneration the employee receives whilst on annual leave, should include an amount attributable to the commission he would otherwise have received had he been at work.

Mr Lock did receive commission whilst on annual leave for sales that had already completed for work already incurred, as these payments were made in arrears. The case was concerned, however, with the fact that he could not earn commission whilst on annual leave, and that as a consequence, his future remuneration would be lower than it would have been, if he had been at work during the leave period (and had not taken annual leave).

The opinion was reached on the facts, as the employee’s commission payments were ‘intrinsically linked’ to his role and often amounted to around 60% of his overall remuneration package.

Additionally, the Advocate General indicated that he wanted to avoid a situation whereby an employee was placed at a financial disadvantage as a result of taking annual leave.

Arguably most far-reaching of all however, was the Advocate General’s opinion that a reference period of 12 months should be considered in order to calculate the average commission payments that should be taken into account. This does not sit comfortably with the 12 week reference period under the Employment Rights Act that is used to calculate an average ‘week’s pay’, where for example, an employee’s hours (and therefore remuneration) vary.

Whilst the decision is not binding, the consequences of it being followed by the ECJ could be significant for employers and could cause significant difficulties both in terms of calculating holiday pay in the future and banks in funding “unearned” commission during leave periods.