With school holidays under way, thoughts of UK employees are now turning to their summer holidays. Given the far-reaching implications of the recent case of Lock v British Gas, employers with employees on commission arrangements need to take special care when paying employees during annual leave.
The recent European Court of Justice decision in the case of Lock v British Gas has established that, in some circumstances, a worker’s holiday pay should be calculated based on salary and commission payments, not just basic pay, where commission payments are “intrinsically linked” to the performance of tasks required to be carried out by a worker.
Mr Lock is a sales consultant with British Gas. Mr Lock’s wage is made up of two elements: (i) a basic monthly salary and (ii) commission payments calculated in accordance with the level of sales achieved (which make up approximately 60% of his monthly wage). Commission is paid subject to customers completing contracts, and therefore commission earned in one month will be paid in subsequent months. When on annual leave, Mr Lock receives commission payments relating to sales achieved in previous months, and also holiday pay equal to the basic salary he would have received if he was working.
In December 2011, Mr Lock took a period of annual leave. Consequently, Mr Lock incurred a reduced income in the following months because he had not generated any sales during this period of holiday. Mr Lock made a claim to the Employment Tribunal for outstanding holiday pay on the basis that this drop in commission income in future months, as a result of taking holiday, was unlawful. Mr Lock claimed that his holiday pay should include an additional element to compensate him for the loss of opportunity to earn commission during his period of annual leave.
Mr Lock’s claim was unusual because he did not suffer any drop in income at the time he took his annual leave. Rather, his complaint was that, as a result of taking annual leave, his commission “pipeline” was disrupted and therefore he suffered a delayed (or deferred) financial disadvantage. Mr Lock argued he should receive additional holiday pay to compensate for this delayed financial disadvantage.
The Employment Tribunal referred this case to the European Court of Justice (“ECJ”) to ascertain whether the Working Time Directive (the “Directive”) requires loss of the opportunity to earn commission during a period of annual leave to be factored into the holiday pay calculation.
The ECJ decided that:
- Mr Lock was entitled to additional holiday pay to compensate him for not being able to earn commission when taking annual leave
- It was for the UK courts to decide how that payment would be calculated
- It was a fundamental principle that during periods of statutory annual leave, workers should be put in a comparable position to periods when they are working. To deviate from this would be contrary to the motivation of the Directive, which is to ensure that there are no deterrents from taking annual leave.
- It was not relevant that the commission scheme targets had been adjusted to take into account annual leave (i.e. it was irrelevant that Mr Lock’s commission targets were based on 48 weeks’ work as opposed to 52)
In short, the ECJ held that the amount an employee receives as holiday pay should correspond to an employee’s “normal” pay. Where the employee’s remuneration has variable elements (which might include overtime, commission or allowances), these will form part of the employee’s normal pay where they are “linked intrinsically” to the performance of their duties.
Implications of the Decision
This decision will have a significant impact on UK employers and workers.
Employers face the difficult task of trying to devise a Lock-compliant commission scheme. The argument of British Gas that their commission targets and payments were based on 48 weeks’ work (and not 52) was rejected by the ECJ.
The Advocate General proposed compensating employees for holiday periods with an average level of commission calculated by reference to commission earned over the previous 12 months (see the Advocate General’s opinion here). However, it will be up to the UK courts to decide whether UK law can be interpreted “purposively” to comply with the Lock decision and, if so, what calculation method is appropriate.
The extent to which this decision could have a broader impact is difficult to predict. It is unclear whether this principle will only apply to workers such as Mr Lock, whose pay was predominantly commission-based, or whether it could apply where commission is a smaller element of pay. The ECJ itself did not elaborate. All workers who are rewarded based on performance suffer some kind of hypothetical loss of earning capacity (whether through commission/bonus schemes or other performance incentives) during periods of annual leave and, accordingly, the impact of this decision on employers has the potential to be far-reaching.
The decision opens the door to UK workers who regularly earn commission as a substantial proportion of their overall remuneration claiming back pay, in respect of holiday pay which was calculated by reference to basic salary only.
There is no basis to assume from the judgment that these principles will also apply to annual leave in excess of the four-week entitlement derived from the EU Working Time Directive. However, we anticipate that this point will be explored in future litigation.