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Holiday pay entitlement: points for employers to consider in calculations

Has your company amended their arrangements for paying commission following the European Court of Justice’s judgment in Lock v British Gas? Employees’ holiday pay entitlement has long been a source of litigation in the Employment Tribunals and courts and this case provides further guidance on calculating a worker’s entitlement to holiday pay.

Commission based jobs

In May 2014, the ECJ held that, where a worker’s pay ordinarily includes commission, then that commission has to be taken into account when calculating remuneration in respect of paid annual leave.

As the holiday period draws to a close, people like Mr Lock – an energy sales consultant whose commission was not paid at the time the work which generated the commission was done but many weeks after the conclusion of the sales process – will be feeling the effects of reduced earnings as a result of taking annual leave and, consequently, being unable to do work that would have led to earning commission. Mr Lock’s commission made up approximately 60% of his total pay packet.

Working Time Directive

According to the ECJ, a common pay arrangement such as Mr Lock’s is likely to deter people from taking annual leave because of the deferred reduction in commission. It is therefore contrary to the Working Time Directive, implemented in the UK through the Working Time Regulations 1998.

This follows the reasoning in British Airways plc v Williams and others. In this, the ECJ found that any inconvenient aspect linked intrinsically to performance of tasks a worker is required to carry out under a contract of employment, for which a monetary amount is provided and included in the calculation of the worker’s total remuneration, must be taken into account for the purposes of calculating annual leave payments. In the case of Williams, it involved variable supplementary payments to pilots linked to time spent flying and away from base.

By contrast, money intended to cover occasional or ancillary costs arising through performance of the work – such as meal allowances – need not be taken into account.

Holiday pay calculation

Has your company acted to change the commission structure and holiday pay calculation in the wake of Lock? If not, the risk of a wholesale breach of the Working Time Regulations is high, particularly now as workers return and question the deferred impact on wages or salaries.

The question also remains as to whether this line of reasoning will be expanded further: what about tips for restaurant staff or playing bonuses for professional sports people in the off-season? Watch this space for more.

If you would like your pay arrangements reviewed, please contact David Sillitoe on 0113 368 7871 or by email to dsillitoe@lyonsdavidson.co.uk in the Leeds Employment Department.

Posted on Oct 14th, 2014 by Lyons Davidson