Paying staff commission during holidays by Jo Keddie, Partner, Winckworth Sherwood on 30-May-2014

The European Court has delivered a landmark decision that will affect all UK employers who reward their employees through a combination of salary and commission.

The decision in Lock v British Gas, delivered on 22 May 2014, is likely to affect a significant majority of those employed in UK businesses where commission arrangements are commonplace for rewarding staff, warns Jo Keddie, Partner and Head of Employment law at Winckworth Sherwood.

European legislation states that every worker is entitled to paid annual leave. This is an important principle of European Union social law from which there should be no derogation. Under the UK's Working Time Regulations, a worker is entitled to be paid a week's pay for each week of statutory annual leave.

This, however, begs the question - what amounts to normal week's pay for statutory holiday periods? Is it just basic pay or should it be the actual or average amount of commission received by the employee and, if it is the average, over what period?

In Lock v British Gas, Mr Lock was a sales consultant for British Gas who was paid commission on a monthly basis. His commission made up about 60% of his annual pay. When he took annual leave, he did not generate sales or any consequential commission. When calculating his holiday pay, his employer calculated it on his basic salary only and ignored any commission. Mr Lock challenged this approach through the Employment Tribunal who, in turn, referred the issue to the European Court to determine whether commission should be included in his holiday pay.

The Court was particularly concerned that Mr Lock would not be able to earn commission whilst on holiday as he would not be able to make sales. This had the effect of deterring him from taking holiday. Further, he would only receive basic salary for the period when he had been on holiday.

The Court determined that, where commission is 'intrinsically linked' to the performance of the worker's tasks, it must be taken into account when calculating holiday pay. In Mr Lock's case, even though his commission fluctuated from month to month, it was still sufficiently permanent to be considered part of his normal monthly remuneration.

The European Court has left it for the UK Courts to decide how to determine 'normal remuneration' and the method of calculating the commission a worker should be entitled to during his statutory annual leave.

The impact of this case is significant as many employers operate commission schemes. Many businesses will now need to take into account not only staff's basic pay and the commission that would have been earned during holiday periods.

Inevitably, this will make holiday pay calculations far more complicated and expensive to process in an area already fraught with technical payroll calculations. It is of small comfort that this change will only affect entitlement to statutory holiday pay and not contractual holiday pay.

Of key importance for employers is the need to review commission schemes and, in particular, consider how closely or intrinsically linked commission payments are to their staff's actual work and performance of their tasks. Some businesses may wish to change pay structures to make the commission element more discretionary.

For more information, please visit: www.wslaw.co.uk

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