Posted by Richard White, Partner
Holiday pay for workers on commission
Large numbers of workers and employees receive basic pay and commission on sales in their pay packets. Many such workers have employment contracts which state that their holiday pay will be calculated on the basis of their basic pay alone. For many years this was the accepted legal position, based on a Court of Appeal case in 2003 (Evans v Malley Organisation Ltd).
However, in a case in 2010 brought by airline pilots in 2010 (Williams & Ors v British Airways Plc), it was confirmed by the European Court of Justice that holiday pay must include “normal remuneration” and that variable payments which are “intrinsically linked” to work performance (i.e. commission payments) must be included as part of their holiday pay. Therefore, to avoid legal claims, employers must now ensure that holiday pay includes commission payments.
A further question has now arisen in another case referred to the European Court of Justice – Lock v British Gas: what about the fact that during holidays, workers and employees are unable to earn commission, which means that their commissions is necessarily reduced on their return from leave?
Mr Lock was an energy sales consultant for British Gas. He was paid a basic salary plus variable commission that was paid in arrears. He took two weeks paid annual leave. During this period he received his basic salary plus commission from previous sales. However, while on annual leave he was unable to generate commission, so he received a reduced income in the months following his return to work. Mr Lock has argued at the employment tribunal that he has effectively been paid too little holiday pay as a consequence; and the tribunal referred this question to the ECJ.
A European Court Advocate General has recently produced an opinion on this issue which is shortly to be considered by the European Court of Justice. This opinion states that Mr Lock should not just receive basic pay plus commission falling due during the holiday period – it should also include compensation for the fact that he would be unable to make sales and therefore earn commission while on annual leave.
If this opinion is ratified by the ECJ, holiday pay for workers who regularly earn commission will need to be made up of three components:
• Basic salary.
• Any commission falling due for payment while the worker is on annual leave.
• An amount equal to the average amount of commission the employee would ordinarily earn while working.
Implications for employers
This means that workers could earn more while on annual leave to make up for the fact that they are likely to earn less after a period of annual leave.
Stay tuned for further developments on this important issue.
If you would like advice on this or any other employment law of HR matter please contact members of our Employment Team.
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