A legal opinion from the European court looks set to have huge implications for UK employers, says Paul Mander, Head of Employment at Penningtons Manches LLP.

According to an opinion of an advocate general of the Court of Justice of the European Union (CJEU) on the case Lock v British Gas Trading, holiday pay should include an amount that reflects average commission previously earned by workers over a prior period of months. This decision will be of major importance to employers.

Under the Working Time Regulations 1998, workers have a right to paid annual leave. The intention is to put the worker in a comparable financial position to being at work. However, until now, holiday pay in the UK was not required to include any element of commission that would have been earned by workers had they not taken holiday.

Facts

Lock was a sales consultant at British Gas Trading. He earned commission, paid monthly, on top of his basic pay. The commission fluctuated but equated to roughly 60% of his total remuneration. At the end of December 2011 he took two weeks' paid annual leave. During this leave period, his remuneration consisted of his basic pay and commission he had earned during the preceding weeks. However, in the months following his annual leave, Lock suffered financially from the reduction to his pay caused by him being unable to generate commission while he was on holiday.

He brought a claim for outstanding holiday pay. The employment tribunal referred the case to the CJEU for a preliminary ruling on whether commission should be included as part of a holiday pay calculation and, if so, how the amount of commission should be calculated.

Opinion

Advocate General Bot concluded that Lock needed to be compensated for not being able to make sales and earn commission during his leave. Part of Bot’s justification for this approach was that holiday entitlement was intended to give workers rest and relaxation and they should not be deterred from taking it. Lock’s commission was directly linked to the work normally carried out by him. While the amount of commission he earned fluctuated from month to month, it was permanent enough for him to regard it as forming part of his normal pay, described in the opinion as a “constant component of his remuneration”.

The employer’s defence was that the amount of commission paid already took into account the fact that workers wouldn’t be able to generate commission during their leave. This argument was rejected.

According to the EU opinion, commission should be included as part of a worker’s remuneration when calculating what that worker should receive as holiday pay. The advocate general suggested taking the average of the commission received by the worker over a representative period of, for example, the previous 12 months, in order to calculate the amount of commission payable.

Comment

An advocate general’s opinion is not binding on the CJEU. However, if the court follows the opinion when it hears the case next year, the decision will set a binding precedent requiring employers to include commission when calculating a worker’s holiday pay. The implications of this case are huge and are an extension of the ruling in the Williams v British Airways case, where the European court decided that payments ‘intrinsically linked’ to an employee's job should be included in the calculation of holiday pay (in that case it was payment for flying hours).

Employers need to consider now what their potential exposure is to challenges of this sort, given that claims could be backward as well as forward looking. They should think about whether it’s worth changing commission structures, and whether they have the software necessary to calculate holiday pay if it includes average commission.

Paul Mander

Paul is head of Penningtons Manches’ employment law team. He advises on a broad range of contentious and non-contentious employment and partnership matters and is recognised in particular for his expertise in restrictive covenant and injunction issues. Paul is experienced in all forms of employment litigation, both in the High Court and tribunals, as well as boardroom disputes, discrimination (in employment and partnership), TUPE matters and outsourcings. He works for a wide range of private sector employers, from a major fast food retailer to financial institutions and in addition acts for senior employees and partners, frequently in relation to discrimination claims.

Paul has appeared on television and in the broad sheet press in relation to employment law issues, and is co-author of the employment section of Tolley's Financial Management Handbook and various sections of Tolley's Termination of Employment Handbook. He is recognised as a leader in his field by both Chambers Guide to the UK Legal Profession and The Legal 500.

Photo: Paul Mander