In a recent case heard by the Court of Appeal, it was held that contractual results-based commission should be included in the calculation of holiday pay for the 4-week statutory holiday entitlement under the EU’s Working Time Directive (WTD). The issue for employers is what this means for their own businesses.
Under English law, employees are entitled to a minimum of 5.6 weeks’ holiday (28 days), including our 8 days of public holidays, which is more than the 4 weeks (20 days) required by the WTD. The question in light of the Court of Appeal’s decision will be how this impacts employers with staff receiving commission. If we look at the case itself, the picture starts to become a little clearer.
Mr Lock was employed and commission earned on sales was an important part of his remuneration package, representing around 60% of his total pay. When he took holiday, he was entitled to basic pay only but continued to receive commission based on his earlier sales.
However, his commission payments were lower during the months following his holiday because he had been unable to generate sales whilst on holiday.
Mr Lock argued that as holiday pay should reflect normal remuneration, his pay should be enhanced to reflect the commission that he would otherwise have earned during annual leave. Whilst there was an academic argument as to the wording of English domestic law and the WTD, the outcome was that Mr Lock’s normal remuneration should indeed include his commission.
What was not decided
The Court of Appeal, however, declined to speculate on the position of employees who receive annual results-based bonuses or those who receive commission when particular levels of turnover or profit are achieved. These circumstances therefore remain an open question.
Cases where there is a settled pattern of work
In such cases, normal remuneration is easily identified as it is pay which is normally received. Payment has to be made for a sufficient period of time to justify the label normal. However, what constitutes a sufficient time has not yet been specified.
Cases where there is no settled pattern of work
In such cases, average remuneration should be calculated over an appropriate reference period determined by national legislation. Whilst there is no case law to say that this is a 12-week reference period as set down by section 221 of the Employment Rights Act 1996, this is the best guidance that can be given.
What should be included? Commission?
Yes, commission should be included where it is intrinsically linked to the performance of tasks under the employee’s contract. In Mr Lock’s case, pay during holiday periods generally included commission earned on previous sales (which was paid in arrears); but he suffered a financial disadvantage after the holiday as a result of not having earned commission during that time. The position is that holiday pay must include an element to offset this disadvantage. Whilst the calculation is left up to the national courts to determine under national law, it must be based on an average commission earned “over a reference period which is considered to be representative”.
Overtime has been identified by courts as being broken down into three categories:
- Guaranteed (compulsory) overtime: where even if the employee is not called on to work, the employer is liable to pay him or her for it
- Voluntary overtime: where an employee cannot be required to work and the employer does not have to provide it
- Non-guaranteed overtime: where the employee is obliged to work overtime if required but the employer is not obliged to provide overtime pay or pay in lieu.
Guaranteed overtime is covered by normal working hours and is therefore included in holiday pay in respect of the full 5.6 weeks’ leave entitlement.
Non-guaranteed overtime should be included in the calculation, as it is required by the employer and therefore intrinsically or directly linked to the employee’s work; but only for the 4 weeks under the WTD.
With regards to voluntary overtime, a recent employment tribunal concluded that these additional elements of pay were not as a matter of contract normal pay. However, based upon the test that what an employee regularly and consistently receives as pay constitutes normal pay, the additional elements should be included.
Indeed, it would appear that the only overtime pay not to be included in the calculation is where it is worked on a rare or occasional basis.