In Lock v British Gas Trading Ltd, the European Court of Justice (ECJ) has confirmed that holiday pay must include a payment in respect of contractual sales-based commission, rather than being based on basic salary only, under the Working Time Directive (WTD).

The case was heard at first instance by Leicester employment tribunal, which recognised that under the natural wording of the Working Time Regulations 1998 (WTR) and the week’s pay provisions of the Employment Rights Act 1996 (ERA), the Claimant was not entitled to a sum in respect of commission in his holiday pay. This position had been confirmed by the Court of Appeal in Evans v Malley Organisation Ltd t/a First Business Support. However, the Tribunal recognised a conflict with the decision in Williams v British Airways plc, in which the ECJ had held that the WTD requires that workers receive their “normal remuneration”, which includes any payments “intrinsically linked” to the performance of the worker’s tasks, during holiday. The Tribunal therefore referred the case to the ECJ for guidance.

In the interim, the Advocate General issued an opinion that the Claimant’s commission was intrinsically linked to his role as a salesman. Therefore, his statutory holiday pay should include an amount to reflect the commission he would have earned had he not taken annual leave.

The ECJ agreed with the Advocate General that employees must be compensated for sales-based commission during holiday. In terms of how such sums should be calculated, the ECJ stated that this must be decided by the national courts or tribunal, focussing on the average commission earned over the appropriate reference period under national law.

This case is now likely to return to the employment tribunal, which will need to consider whether the WTR and the week’s pay provisions of the ERA can be interpreted in line with the ECJ’s decision. It is likely that they will find a way to do so, regardless of how much the wording needs to be stretched. They will also need to determine how commission should be calculated. It is likely that they will use the standard UK reference period of 12 weeks which is used for calculating holiday pay for workers with no fixed hours.

The decision will have a very significant financial impact on employers who pay contractual commission, as they will now have to pay increased holiday pay to all such workers. What is more, the impact of the decision is not limited to commission payments only. “Normal remuneration” which is “intrinsically linked” to the workers’ function may well include overtime payments as well. This point should be clarified by two cases listed in the EAT in July. In the cases of Neal v Freightliner Ltd and Fulton v Bear Scotland Ltd, the Tribunal held that a worker’s overtime payments had to be taken into account when calculating his holiday pay.

The one comfort for hard-hit employers is that the decision is likely to apply only to the four weeks’ holiday under the WTD, not the full 5.6 weeks specified by the WTR or any additional contractual holiday. This point should be confirmed by the Tribunal in due course.

By Fiona Rushforth