In what appears to be an emerging trend to emulate actual regular pay rather than basic pay, the Court of Justice of the European Union (CJEU) has held that holiday pay should include commission if commission forms part of an employee’s remuneration.
Last month I reported that overtime (or its notional equivalent) should be included in holiday pay and that failure to do so could result in significant back pay claims. Applying very similar reasoning the European Court in the case of British Gas v Lock has held that holiday pay should include commission.
Mr Lock was employed by British Gas in 2010 as an internal energy sales consultant. His job entailed persuading business clients to buy energy products. His basic salary was £1222.50 per month. Commission was also paid monthly, based on sales made but with reference to a period some weeks or months earlier (presumably to allow for variations and cancellations).
He was on annual leave from 19 December 2011 to 3 January 2012. His December salary comprised his basic pay of £1222.50 plus commission in relation to earlier weeks amounting to £2350.31. His average monthly commission for 2011 was £1912.67.
During his annual leave he did not make any sales and therefore did not earn any corresponding commission. Logically, that had an adverse impact on his earnings during the month after his annual leave. As a result he brought an employment tribunal claim for what he considered to be the balance of his holiday pay for the period from 19 December to 3 January. This was based on notional commission which he would have earned had he been in work during the period he was on holiday, even though it did not equate to commission earned on actual sales.
In the sort of European judgment which causes understandable irritation to many people, the CJEU held on 22 May that, notwithstanding that Mr Lock received payment of both basic salary and commission during his annual leave, the fact that he lost out on commission in subsequent months because of the holiday should be compensated.
According to the Court he suffered genuine financial disadvantage which might deter him from his right to exercise annual leave, particularly since commission made up the majority of his overall remuneration. So what should be done? The summary provided by the Court is typically unclear:
As regards how to calculate the amount of commission payable to Mr Lock during his annual leave, the Court observes that holiday pay must, in principle, be determined in such a way as to correspond to the normal remuneration received by the worker. Where the remuneration received by a worker is made up of several components, the determination of the normal remuneration payable during annual leave requires a specific analysis.
As far as that analysis is concerned, the Court has already established2 that any inconvenient aspect which is linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment and in respect of which a monetary amount is provided which is included in the calculation of the worker’s total remuneration must necessarily be taken into account for the purposes of calculating the amount to which the worker is entitled during his annual leave.
As regards the commission received by Mr Lock, the Court notes that that is directly linked to his work within the company employing him. Consequently, there is an intrinsic link between the commission received each month by Mr Lock and the performance of the tasks he is required to carry out under his contract of employment. It follows that such commission must be taken into account in the calculation of his holiday pay.
In that context, it is for the national court or tribunal to assess whether, on the basis of an average over a reference period which is considered to be representative, under national law, the methods of calculating the commission payable to a worker, such as Mr Lock, in respect of his annual leave achieve the objective pursued by the Working Time Directive
The matter now returns to the national court to decide how to apply the judgment. The obvious problem is that the judgment opens up the possibility of a worker being paid more commission than has actually been earned from relevant sales. An employer might therefore seek to reduce the commission payable to cover the shortfall. Other suggestions have included requiring employees to take full holiday entitlements so that the deterrent factor falls away, or averaging out commission payments over such a long period (e.g. 12 months) that there is no material difference to pay when the employee is at work or on holiday.
However, as with overtime and holiday pay, employers need to be very careful to ensure that they are not exposed to significant back pay claims. Contract terms should be reviewed and, as always, should you require any assistance in this regard you should not hesitate to contact us.