When a worker’s normal remuneration is made up of part basic salary and part variable payments such as commission or guaranteed overtime - should the worker's statutory holiday pay be limited to basic salary only?
Background In February 2014 the Lindsays employment team produced a bulletin on the calculation of holiday pay and predicted that it would be the big HR issue in 2014. In the UK, holiday pay is calculated on the basis of a weeks’ pay. A weeks’ pay in the UK is stated to be basic salary only, excluding payments such as working allowances, expenses, overtime, commission and bonus payments. The cases of British Airways plc v Williams and Others, Neal v Freightliner Ltd, and Lock v British Gas Trading Ltd all indicated that basic salary is not the correct method of calculation. Holiday pay should be inclusive of payments such as working allowances, expenses, overtime, commission and bonuses. For a definitive statement of the law in this area however we have been waiting on the European Court of Justice (ECJ) to deliver its judgement in the Lock v British Gas Trading Ltd and Others and on 22 May 2014 the ECJ delivered its long awaited decision.
Facts Mr Lock was employed by British Gas as a sales consultant, his basic pay was £1,222.50 per month and he also made an average monthly commission on sales of £1,912.67. When Mr Lock took annual leave he was paid based on his basic pay of £1,222.50 only and commission payments were excluded. Mr Lock raised a claim at the Employment Tribunal for unlawful deduction of wages on the basis that his holiday pay should comprise both his contractual basic salary and contractual commission payments. The Employment Tribunal then referred two questions to the ECJ for a ruling:
- When calculating holiday pay, should a worker taking annual leave be paid by reference to commission payments that the worker would have earned if at work, as well as basic pay?; and
- If the answer to question 1 is “Yes”, how should holiday pay in relation to variable payments such as commission be calculated?
Decision The ECJ answered “Yes” to the first question stating that the term “paid annual leave” in Article 7 of the Working Time Directive means that, for the duration of annual leave, remuneration must be maintained. Therefore workers must receive their normal remuneration for that period of rest. The purpose being to put the worker into a position, as regards salary, that is comparable to periods of work. However, the ECJ avoided setting out a method for calculating holiday pay stating that normal remuneration requires a specific analysis in each case. The ECJ stated that National Courts should determine whether an employee has received the correct holiday pay, by reference to the principle that pay should be calculated to correspond with the normal remuneration received by the worker during periods of work.
Comment The Case clarifies the principle that any monetary payment which is intrinsically linked to the performance of tasks which a worker carries out under their contract of employment, must be taken into account as part of the workers “normal remuneration” when calculating holiday pay. Employers should therefore review their annual leave arrangements to ensure that commission or other relevant variable payments are factored into holiday pay calculations. The ECJ left open the question of how best to ensure a worker receives pay comparable to their normal pay while on holiday but the key to compliance for employers will be to choose a representative reference period (for example the previous three months earnings) to identify a workers “normal remuneration”.
If you would like to discuss this issue in more detail, please get in touch with a member of our employment law team.
