Commission should be included in calculation of statutory holiday pay

The European Court of Justice (ECJ) has ruled that contractual sales commission was intrinsically linked to the performance of an employee's duties and therefore was part of his “normal remuneration” for the purposes of calculating statutory holiday pay.

| Filed under european court of justice

In the case before the ECJ sales commission made up approximately 60% of the employee's take home pay and he therefore suffered a significant drop in income when he took annual leave, for which he was only paid his basic salary. As paid annual leave was introduced under the Working Time Directive as a health and safety measure, to ensure that employees take adequate rest from work, the ECJ ruled that such a significant drop in take home pay for periods of leave was a disincentive to take leave and therefore incompatible with the Directive. However the principal established by the ECJ is not limited to those cases where commission makes up a large percentage of take home pay and the implications of the case are likely to be far-reaching.

Unfortunately the ECJ has given no guidance as to how the value of commission “lost” during periods of annual leave should be calculated. Unless the case is settled this point will fall to be decided by the Employment Tribunal that made the referral to the ECJ.The Advocate-General suggested that it might be appropriate to pro-rate annual commission earnings, although this might lead to inequitable results, for example if the employee had a particularly “good” – or bad – year preceding the holiday.

Under the Working Time Regulations holiday pay for those without fixed remuneration is calculated by reference to the 12 weeks immediately preceding the holiday. However this too may result in distortions, for example if employees seek to time holiday to ensure that particularly large/atypical commission payment falls within the reference period. Managers may need to become much more attuned to commission payment dates/amounts of commission due when signing off holiday requests.

It is worth noting that the ECJ ruling only applies to the 4 weeks of leave - inclusive of bank and public holidays – that the Working Time Directive requires, and not to the 5.6 weeks that the Working Time Regulations entitle employees. However if employees bring claims for payment of commission on past holidays as unlawful deductions from wages claims (as has been common in the past) then it is possible that they may be able to make claims for compensation stretching back many years, possibly even to the start of their employment.

The full ECJ judgment can be viewed on the link below.

Further reading

Disclaimer

This news item is not intended as a comprehensive summary of the subject matter and does not constitute legal advice. Parties are advised to obtain professional advice addressing individual facts and circumstances before acting on this information.