Should You Include Commission Payments When Calculating Holiday Pay?

Calculating Holiday Pay? Include CommissionA recent decision of the European Court of Justice may have some expensive consequences for employers who pay commission.

In the case of Lock v British Gas Trading Limited, Mr Lock, an internal energy sales consultant, argued that commission should be included in calculating his holiday pay because commission formed part of his normal pay.

He had taken periods of annual leave for which he received his basic pay only and did not receive any payment for commission.  This meant that he was losing more than 50% of his average earnings during periods of annual leave.

The ECJ decided that commission must be taken into account when calculating holiday.

Otherwise, the worker will be placed at a financial disadvantage when taking statutory annual leave because no commission will be generated during the holiday period. This is likely to deter the worker from exercising the right to annual leave. 

This decision has a number of implications for employees and employers.

Calculating holiday pay could become complicated

At the moment, it’s not clear whether or not employers should use a reference period of 12 weeks (as is normal in UK law) or 12 months (as has been recommended by the Attorney General) when calculating the amount of holiday.

If the 12 week reference period applies, some employees might try to organise their holidays so as to maximise the windfall when the holiday pay is calculated.  For example, they may decide to take their holiday just after a particularly busy season.

This problem could be avoided if a 12 month reference period applies.

Should employers also include overtime payments?

Employers have often omitted overtime payments from holiday pay calculations. However, the principle of not deterring your staff from taking their holiday is likely to mean that overtime payments should be included in the calculation as well.

There are two cases due to be heard in July that will decide this issue. Watch this space!

Employers may face a massive claim for backdated holiday pay

The ECJ ruling is not technically a change in the law, but merely clarification of it. Technically, the “new” position has always applied.

This means that if an employer has only been paying basic pay for holiday periods, there is a risk that employees will be able to claim back-payments going back up to 16 years (to the start of the Working Time Regulations)!

This could create a windfall for employees but a significant financial burden for employers.

Contact an employment solicitor for advice

If you would like advice on the consequences of this decision, please feel free to get in touch.