Legal Update: Statutory Holiday Pay should include both basic salary and average commission payments

29 May 2014


In the recent case of Lock v British Gas Trading Ltd and others C539/12 the Court of Justice of the European Union (CJEU) held that salespeople are entitled to receive average commission payments, on top of their basic pay, in respect of periods of statutory annual leave. These holiday payments should be calculated to include the commission the worker would have earned, if they had attended work during that period.

The Facts of the Case

Since 2010, Mr Lock has been employed as a salesman by British Gas. Each month he receives his basic salary. He is also entitled to receive a contractually variable commission payment, based on the sales that he has achieved. The commission is paid in arrears and on average it makes up over 60% of his remuneration.

Mr Lock took a period of annual leave from 19 December 2011 to 3 January 2012, during which time he was unable to earn commission. He therefore received less income in the months following this period of leave. He brought a claim to the employment tribunal (ET) for outstanding holiday pay. The ET referred the following questions to the CJEU:

1. When calculating holiday pay, are Member States required to take measures to ensure that a worker is paid in respect of periods of annual leave by reference to the commission payments he would have earned during that period, had he not taken leave, as well as his basic pay? 
2. If so, what principles are required to be adopted by a Member State when calculating the sum that is payable to the worker by reference to the commission that the worker would have or might have earned if he had not taken annual leave?

The CJEU decision

1. Commission included

Following the case of Williams and others v British Airways plc the CJEU held that during periods of annual leave, workers should receive their normal remuneration, including payments which are directly and intrinsically linked to the performance of the tasks they are required to carry out under the employment contract.

This decision is in keeping with the objective of Article 7 of the Working Time Directive (WTD), which is to put the worker, during a period of statutory rest, in a situation which as regards his salary, is comparable to his periods of work. The CJEU found that a reduction in a worker’s remuneration would be likely to deter him from exercising his right to take annual leave, which is contrary to the objective pursued by Article 7 of the WTD. Therefore, in order to avoid Mr Lock being at a deferred financial disadvantage when taking annual leave, it was held that his statutory holiday pay should not be limited to his basic salary, but should include an amount to reflect the commission payments he would have earned had he not taken annual leave.

2.  Calculating holiday pay

The question of how to calculate holiday pay inclusive of an average commission payment and the reference period to which that calculation should relate, remains tricky and uncertain. Despite the Advocate General’s earlier suggestion that a reference period of 12 months would appear to be appropriate to calculate the holiday pay due, the CJEU stated that the calculation of the level of holiday pay is a matter for national courts to decide with reference to relevant case law and in line with the objective pursued by Article 7 of the WTD. In addition, the CJEU advised national courts to focus on the average commission earned during a reference period which is considered to be representative under national law. It is therefore unclear how long the reference period will be in practice and whether, if a longer reference period is applied, employees could successfully argue that, for example, they are entitled to receive holiday payments in respect of city bonuses.

However, under the ERA (national law), the reference period usually applied to determine an average ‘week’s pay’ for workers whose remuneration varies with the amount of work done, is 12 weeks.  Therefore, if and when this case returns to the ET, it may be deemed to be appropriate to calculate the weekly amount due by averaging out the total remuneration Mr Lock received over a 12 week reference period.

Summary and practical steps

In summary, where a worker’s pay consists of basic and variable elements which are directly and intrinsically linked to work (such as commission or potentially overtime, allowances or bonuses), holiday pay should be paid at a level comparable to normal pay to ensure that a worker is not deterred from taking holiday for financial reasons. It is nonetheless unlikely that this extra element of holiday pay extends to any holiday taken beyond the four week statutory minimum annual leave entitlement.

In light of the ruling, I would hope employers are now carefully reviewing their contractual leave provisions and entitlements in order to ensure that where appropriate commission or other variable payments such as overtime, allowances or bonuses are factored into statutory holiday pay, to ensure that the objective of Article 7 of the WTD is being met.

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