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14 May 2014

Holiday Pay and Unearned Commission

In the latest of a series of cases on the correct calculation of holiday pay (Lock v British Gas Trading Limited and Others), the Advocate General (AG) has handed down his opinion that a correct interpretation of the EU Working Time Directive (WTD) requires that the holiday pay of an employee whose normal remuneration is made up of a basic salary plus variable commission should include an amount equivalent to the sum he would have earned by way of commission had he been working.

Mr Lock's normal pay included a commission based on sales in the previous month, and this made up over 50 per cent of his salary. As he could not achieve sales whilst on annual holiday, this meant that his pay for the month following was lower than usual. He brought an Employment Tribunal (ET) claim for outstanding holiday pay.

The ET referred the matter to the Court of Justice of the European Union (CJEU), asking whether, in such circumstances, Article 7 of the WTD required commission to be included in holiday pay and, if so, how it should be calculated.

The AG concluded that Mr Lock's holiday pay should include commission. The right to paid annual leave is an important principle of EU law, the purpose of which is to allow a worker time to rest and enjoy a period of 'relaxation and leisure'. If normal levels of pay are not maintained during that period, a worker could be deterred from using their annual leave entitlement. The AG rejected British Gas's argument that the commission rates payable took account of the fact that employees would not be able to generate sales whilst on annual leave.

As regards how the commission-based element of holiday pay should be calculated, the AG considered this to be a matter for the referring tribunal but suggested that an average of the commission received over a twelve-month period would be an appropriate method.

Whilst the opinion of the AG is not binding on the CJEU, this decision is in line with earlier case law, which suggests that holiday pay of just basic salary on its own is not sufficient if this is not the worker's 'normal remuneration', defined as remuneration which is 'linked intrinsically to the performance of the tasks which the worker is contractually required to carry out under his contract of employment and in respect of which a monetary amount is provided' (British Airways plc v Williams). The ET's subsequent decision in Neal v Freightliner Limited, that holiday pay based on average earnings over the 12 weeks preceding the leave must include non-guaranteed overtime, whether this is compulsory or voluntary, is currently the subject of an appeal.

We will keep you abreast of developments. Please contact Hannah King on 01753 278659 or email employmentlaw@bpcollins.co.uk  if you would like advice on your individual circumstances.

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