The recent European elections have once again opened up the question about how happy EU member states are with their governance. The rise in popularity of a number of extreme right wing parties may only partly be dissatisfaction with the European Union (although that is not the stated position of the UK’s own anti-establishment party) and may owe more to extreme economic discomfort, a rise of nationalism and fears (whether unfounded or not) of immigration.

Into this mix the Court of Justice of the European Union has handed down a decision on holiday pay which will not delight many employers (although it may make workers on commission very happy).

How should you calculate what to pay for someone’s holiday when over half of their normal pay is based on commission? Whilst on holiday they do not (and cannot, of course) earn commission. You just pay their basic salary, right? Wrong, says the Court of Justice in the case of Lock -v- British Gas Trading Limited.

In Mr Lock’s case, his basic salary was about 40% of his normal remuneration and his commission payments made up the remaining 60%. He was employed by British Gas Trading Limited as an internal energy sales consultant. He received a basic salary and commission on top of all of the sales that he achieved. The commission would be paid typically several weeks, or sometimes several months, after a sale was concluded. The period in question related to his statutory annual leave that he took place between 19 December 2011 and 3 January 2012. During this time Mr Lock was simply paid a basic salary and the only commission that he received was from previous sales that fell due during the period. However, in the months following his return to work Mr Lock received a significantly reduced income because he had not secured sales whilst he was on holiday. He brought a claim in the Employment Tribunal arguing that he should be paid full income based on notional commission and that the reduced income that he was in fact paid was a breach of the Working Time Regulations 1998.

There have been conflicting decisions in this area and the Employment Tribunal quite sensibly referred some questions to the Court of Justice. The two questions that were asked were:

  1. whether the Working Time Directive required member states to ensure that a worker is paid in respect of periods of annual leave by reference to commission payments he or she would have earned had he or she not taken leave; and
  2. If so, what principles member states should adopt when calculating the sums payable to a worker by reference to commission that he or she might have earned.

The decision which came out on 22 May 2014 seems to have surprised a large number of commentators. The court has followed the opinion of the Advocate General and taken the line that the entitlement of every worker to paid annual leave must be regarded as a particularly important principle of European law from which there can be no derogations. In other words, the principle of taking annual leave is fundamental. The court formed the view that a significant reduction in a worker’s remuneration (which would occur if they were not paid for notional commission they might have earned) would be liable to deter a worker from actually exercising their right to take annual leave. As this is contrary to the objective in Article 7 of the Directive it needs to discouraged.

As to how notional commission should be calculated, the court said that this should be decided by the local courts in each country in accordance the rules and criteria set out by European case law. Taking a more practical position, the Advocate General has previously suggested that taking the average amount of compensation received by the worker over a representative period (for example the previous 12 months) would be appropriate.

The principle behind this decision is a simple one, but will still come as a surprise to many employers. The Court of Justice was concerned that not pro-rating notional commission might have the effect of discouraging workers from taking holidays and the principle behind the Working Time Directive is that it is better for all of us (and society in general) if people take regular holidays every year and are not discouraged from doing so.

This decision will result in increased holiday pay costs for many employers. This is particularly so for employers who rely on commission payments to make up a large part of their employees’ remuneration. Employers would be advised to have robust systems in place which can actually calculate average rates of bonus/commission payments which, if required, could be used to justify how employees’ pay is calculated.

Another question for those employers who only pay basic salary during holidays will then be how far back current employees can go to claim unpaid commission payments. Claims cannot generally go back more than three months, although where there is a continuing loss this can be circumvented, and the issue of retrospective effect in other areas of employment law (for example equal pay) has been complex. Sadly the answer to this does not look straightforward and may in itself generate further uncertainty, claims and cost to business. As if this is not enough, it also not entirely clear whether the notional commission should be applied only to the minimum amount of holiday required by the European Union Directive (which is four weeks’ annual leave) or the amount of holiday required in the UK (which is 5.6 weeks’ annual leave). This is because the UK Working Time Regulations 1998 provide for an entitlement to annual leave and also for an entitlement to additional annual leave of a further 1.6 weeks. Whilst it seems very likely that notional commission will need only be calculated for the lower of these two amounts (the four weeks) this is still potentially an area for argument.

How this will play in the popularity stakes and what it will do for EU standing in general is not so clear. Whilst this decision may be seen as an unwelcome and retrograde step for a number of the EU’s companies and businesses, there are probably a far greater number of individual workers who are paid commission who may benefit from it. Whether the Court of Justice and the European Union will gain enemies or friends because of this decision remains to be seen.