Holiday Pay: To pay or not to pay, that is the question

A recent case handed down from the Court of Justice of the European Union will affect employers with any workers whose pay incorporates commission, either wholly or in part. Those workers are now entitled to have that commission reflected in their holiday pay.

Most FE colleges will not employ individuals on contracts where commission is payable. However, some colleges will do so, such as those in assessor roles who are paid for hitting certain milestones. Nevertheless, this case serves as a reminder that other payments made to employees during the course of their employment may be used as an argument to support a case for greater holiday pay on termination of employment. Other cases are lined up to be heard in the next few months, which could alter the calculations yet further.

The present case

The claimant was employed as a sales consultant. His monthly pay included commission that equated to, on average, 60% of his pay. He took two weeks’ paid annual leave but suffered financially on return to work due to lost commission during that leave. Consequently, he brought a claim for lost holiday pay.

Despite the fact that his commission varied month to month, it was directly linked to the work he carried out and thus formed a permanent part of his normal salary. Not having this acknowledged in his holiday pay caused him to suffer a financial disadvantage, which, he argued, acted as a deterrent to exercising the right to annual leave. This was contrary to the intention of the legislation.

Consequently, the Court held that his commission must be taken into account when calculating holiday pay.

The previous position

Under the Working Time Directive, which was implemented in the UK through the Working Time Regulations 1998, every worker has the right to 5.6 weeks’ paid annual leave at the statutory rate of a week’s pay for each week of leave.

A week’s pay is simply the normal remuneration that a worker could expect to earn in a week, calculated by taking average earnings over the 12 weeks immediately prior to the first day of leave where earnings vary.

Whether or not “normal remuneration” during a period of annual leave should include allowances on top of basic salary has been considered before. The position was that any aspect of pay that is ”intrinsically linked” to the performance of the tasks that the worker is required to carry out should be included in the calculation of the worker’s total remuneration. A specified number of guaranteed contractual overtime hours, for example, should be included in the calculation of normal remuneration.

The situation going forward

Every worker retains the right to paid annual leave at the above statutory rate.

However, following this case, employers will need to factor in commission into any calculation of holiday pay where an employee:

• receives commission as part of their remuneration;
• that commission is permanent enough to be regarded as forming a normal part of their monthly pay; and
• there is an ‘intrinsic’ link between that commission and the performance of tasks they are required to do.

Implications

The case itself in terms of the calculation of “commission” is unlikely to impact hugely on the FE sector. However, Colleges should be alert to the issue of the calculation of holiday pay generally given that the Court’s purposive approach seems to suggest that other payments may need to be looked at as part of holiday pay calculations, such as overtime. There are cases currently waiting to be heard on this issue and further updates will no doubt be forthcoming in the next few months.

It is not yet clear how employment tribunals will approach this issue of commission. Employees could, theoretically, gain a financial advantage from taking annual leave immediately following a lucrative sales period. There may even be the potential to claim lost payments in previous years.

Employers should scrutinise their commission policies to establish which additional payments that form part of their workers’ pay should be included in their holiday pay, and whether commission structures need to be varied to take account of the ruling.

Holiday pay should be straightforward for employers to calculate. But this case has now made such calculations more complicated and possibly more costly for employers. A specific analysis of the components of holiday pay is now required to determine what should actually be paid for a period of leave.

Matt Kelly is a partner at Thomas Eggar, the law firm