The European Court of Justice recently issued a decision about the calculation of holiday pay which will have potentially important consequences for employers. In British Gas v Lock, the Court held that holiday pay in respect of workers' statutory minimum period of leave should be calculated by reference not just to salary but also to variable elements of their remuneration. For those workers with fluctuating earnings, holiday pay cannot be limited to basic salary.

The case

Mr Lock was a sales consultant who received sales commission in arrears by reference to completed sales. These commission payments represented in the region of 60% of his overall earnings. Whilst on holiday, he received his basic salary together with any commission payments that fell due for sales completed before his holiday. He was not paid any commission in respect of the period of holiday itself. This was because he was at that time away from work and he was not concluding sales. Consequently his holiday pay did not reflect sales which he could have concluded during the holiday period had he been at work. Mr Lock argued that, because he could not earn commission during holidays, his earnings were lower than if he had not taken holiday.

The European Court of Justice considers that the right to paid annual leave is a “fundamental social right”. In line with this, it was held that, in calculating holiday pay, Member States must take measures to ensure that a worker taking leave is paid by reference to commission payments that the worker would have earned if he or she had been working. The individual’s commission payments were directly linked to his work and therefore constituted normal remuneration for the purpose of the relevant European legislation. Where a worker receives variable payments which are directly related to the individual’s work, those variable payments should be included when calculating holiday pay so that the worker receives holiday pay comparable to normal pay. This conclusion was seen as consistent with the principle that paid annual leave is a fundamental social right by ensuring that workers are not deterred from taking their annual holiday entitlement by financial considerations i.e. the loss of variable commission payments while on leave.

The European Court of Justice did not decide how holiday pay should be calculated in relation to variable payment such as commission – this is an issue for the national courts to decide.

Impact

The implications for employers are potentially significant in terms of their employment costs in relation to holiday pay and the potential for backdated claims to be launched. That said, it is important to appreciate that this decision only relates to the statutory minimum annual leave entitlement under the Working Time Regulations 1998 and not any additional contractual holiday entitlement that the employer may offer. In due course the Government will no doubt issue amendments to the Working Time Regulations 1998, which govern statutory holiday entitlements, to deal with the principle established in this case.

In any event, as a result of this decision, employers will want to review their commission payment structures and how holiday pay is calculated. It may be that employers develop commission structures that incorporate an element for holiday by way of a “roll up” provision.