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EU Businesses faced with costly holiday pay bill - retailers, restaurants and others take note!

Nick Thorpe
05/06/2014

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United Kingdom

The European Court of Justice (ECJ) has confirmed that commission should be included as a component in the calculation of a worker’s holiday pay.

The European Court of Justice (ECJ) has confirmed that commission should be included as a component in the calculation of a worker’s holiday pay (in its ruling in Z.J.R. Lock v. British Gas Trading Limited).   The ruling means that any worker who receives commission in addition to their basic salary will be entitled to have this reflected in their holiday pay when they take annual leave.    

Businesses with operations in the European Union will be affected by this important judgement. Franchisors for whom this is an issue may well wish to alert their franchisees to prepare for the potential liabilities they are likely to face.

The ruling has potentially wide reaching implication for retailers and other businesses which pay sales commission.  Not only will they now be faced with even more complicated and costly holiday pay calculations but it could leave some businesses with a significant back pay bill, potentially running into millions.  Many will recall the reports last Summer of  UK department store John Lewis operator paying staff £40 million in back payments to correct past errors made in the calculation of holiday pay, to reflect shift premiums and overtime.  This ruling will now require retailers  and other businesses to review their payroll systems again to ensure commission is also included.

The ruling also leaves open questions about other elements of pay, including overtime and bonuses, and even "tips" – as the general principle behind this ruling is that all elements of pay intrinsically linked to the tasks that a worker is required to carry out  should be reflected in the worker's holiday pay when they take annual leave.

The case itself concerned Mr Lock, a sales consultant for British Gas.    Like many people in sales, Mr Lock's remuneration consisted of two main components: basic salary and commission.   His commission was paid in arrears on a monthly basis, based on sales achieved.

Mr Lock’s holiday pay had been calculated on his basic salary only.   While Mr Lock received commission payments during annual leave for sales made during previous weeks, during periods of annual leave when he did not undertake work, he would not generate any commission. Therefore, his pay would potentially be lower in the weeks following his return from leave than it would be if he had not taken any leave.

The ECJ was concerned that this might deter workers, like Mr Lock, from actually taking leave, particularly if commission represented a sizeable proportion of their total remuneration. In Mr Lock's case, commission accounted for up to 60% of his total remuneration.  The ECJ concluded that, as commission was intrinsically linked to the tasks Mr Lock was required to carry out, it should be factored into the holiday pay calculation.

As to how one might calculate the amount of commission payable during annual leave, the ECJ left this question for the national courts to decide.

In its ruling, the ECJ makes reference to calculating the amount of commission on an “averaging” basis. However, the ECJ said it was for the national courts or tribunals to assess whether using an average calculated over a particular reference period as a method to calculate the commission payable to a worker in respect of their annual leave achieved the objectives of the Working Time Directive.   In other words, an employment tribunal would need to satisfy itself that the method used by an employer to calculate the commission payable during annual leave does not leave the worker financially worse off and potentially deter the worker from taking leave.

As the law currently stands in the UK, the reference period to calculate “average” pay is a 12 week period. However, as the Advocate General noted in his earlier opinion, using a longer reference period may be more appropriate when it comes to calculating an “average” in relation to commission payments, particularly when there are peaks in sales, for example in the lead up to Christmas.   Determining the appropriate reference period and amount which is representative of the commission that a worker would otherwise have earned (and which will not leave the worker financially worse off if he takes leave) will depend on a number of factors, including the nature of the work, how the commission is earned and the regularity of the payments.

The ruling has been reported in the national press in the last few days.  It is likely to be only a matter of time before sales staff will start to question their holiday pay calculations.   It is therefore important for businesses to take pro-active steps now to understand their potential exposure, how it might be mitigated and how best to calculate holiday pay going forward.

If you have any queries regarding the potential impact that this case might have on your current commission and holiday pay arrangements, please do not hesitate to speak to any member of our team.

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