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Holiday Pay – What Should Be Included?

Should variable commission payments be taken into account when calculating statutory holiday pay? 

Yes, said the European Court of Justice (ECJ) in the recent case of Lock v British Gas Trading Limited. 

Mr Lock was a sales consultant for British Gas and was paid a basic salary plus commission earned from the sales he achieved which formed about 60% of his pay.  When he was on annual leave, he did not generate any commission which meant that his salary in the months following any period of annual leave was reduced.  Mr Lock brought a claim for outstanding holiday pay before the Employment Tribunal (ET), who made a reference to the ECJ asking whether such an arrangement (commission being lower as a result of taking annual leave) was precluded by the Working Time Directive, and if so, how should holiday pay be calculated.

British Gas and the UK attempted to argue that, as Mr Lock had received payments of commission whilst he was on annual leave, the Working Time Regulations (which implements the Working Time Directive in the UK) had not been breached.  However, the ECJ held that, as the commission payments received by Mr Lock following a period of annual leave would be reduced, the employee would be deterred from taking annual leave which was the principle objective of the Directive. 

The ECJ had earlier decided in the case of Williams and Others –v- British Airways that holiday pay should equate to “normal remuneration” and therefore include all components of pay which were “intrinsically linked” to the performance of duties under the individual’s contract, or which related to their status.  Holiday pay would therefore include supplements paid for performing a role, or overtime which was mandatory under the contract.  This was later extended in the ET case of Neal –v- Freightliner Limited which held that voluntary overtime must also be taken into account when calculating holiday pay, at least in respect of the minimum 4 weeks’ statutory annual leave provided by the Working Time Directive.  This case is however subject to appeal and will be considered by the Employment Appeals Tribunal in July 2014.  Employers are therefore advised not to make any knee jerk reaction in relation to the calculation of holiday pay until this point is also settled. 

In response to the second question asked by the ET, the ECJ did not provide any specific guidance as to how the variable commission should be included in holiday pay.  This has been left for the national courts to determine and we must now wait to see how the ET will interpret this when the case is returned to it later this year.

In the meantime, employers are recommended to review their contractual documentation to ensure that payments of commission are not expressly excluded from the calculation of holiday pay. 

For more information please contact Martin Sinclair or Nicola Gray or call  01224 632464.

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