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2nd June 2014

ECJ Rules on Commission Payments during Annual Leave

Following a referral by the Leicester Employment Tribunal, the European Court of Justice (ECJ) has ruled that, where an employee’s remuneration includes contractual commission (which is determined by reference to sales achieved), the Working Time Directive prevents the calculation of holiday pay being based solely on the employee’s basic salary.  In reaching its decision, the ECJ also held that if commission payments were not taken into account, an employee would be placed at a financial disadvantage when taking statutory annual leave as no commission would be generated during the holiday period.

The case that was referred to the ECJ related to Mr Lock, who was employed by British Gas Trading Ltd as an internal energy sales consultant. He received a basic salary plus commission on the sales that he achieved. The commission was paid several weeks or months after Mr Lock concluded a sale and made up approximately 60% of his remuneration.

Mr Lock went on statutory annual leave between 19 December 2011 to 3 January 2012. During this time, he was paid his basic salary plus the commission from previous sales that fell due during the period. However, he suffered a reduced income in the months following his return to work because he had not secured sales, and had therefore not generated commission, while he was on holiday. He brought a claim in an employment tribunal, arguing that his reduced income amounted to a breach of the Working Time Regulations.

As outlined above, upon the case being referred to the ECJ, it held that the Working Time Directive precludes a national law under which a worker, whose remuneration consists of a basic salary and commission (determined by the employment contract with reference to sales achieved) receives statutory holiday pay based only on his basic salary.  As Mr Lock was not able to generate any commission during his holiday, the ECJ found that this led to a financial disadvantage – even though this took effect some weeks after his holiday period.  The ECJ also stated that a reduction in a worker’s remuneration is liable to deter him from exercising his right to take annual leave is contrary to the objective pursued by the Working Time Directive.

The ECJ did not provide any guidance in relation to how the commission element of holiday pay should be calculated, and instead stated that this must be assessed by the national court or tribunal on the basis of the rules and criteria set out by case law and in light of the objective pursued by the Working Time Directive.  In view of this, domestic tribunals will now need to consider whether the Working Time Regulations and, in turn, the week’s pay provisions of the Employment Rights Act 1996 can be interpreted in line with the ECJ’s decision.

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