Should holiday pay include commission?
The short answer, is yes, commission should be included in the calculation of holiday pay. The employment law case Lock and British Gas Trading Limited 2014 has helped to define regulations on holiday pay in relation to commission. I’ll explain the case in detail further down.
Commission is defined as an amount of money an employee receives as a result of making sales, which can make up some or all of their earnings. In the UK, full-time workers have a right to 5.6 weeks paid annual leave under The Working Time Regulations, although the European Working Time Directive does not specify how holiday pay should be calculated.
Up until recently, it was considered that only the basic salary had to be paid to a worker during any period of annual leave even when a worker received a basic salary with commission payments as part of their normal remuneration. However, the 2014 case of Lock v British Gas Trading Limited established the legal principle that commission payments must be taken into account when calculating the salary to be paid during holiday.
Lock vs British Gas explained
Mr Lock, a sales consultant at British Gas, received a monthly basic salary plus a variable commission that consisted of about 60% of his total monthly pay, exceeding his basic monthly salary, and depended on the number and type of sales he made. His commission was paid at the time the sales contract was entered into and not when he carried out the work to achieve the sale.
During a holiday which he took from 19 December 2011 to 3 January 2012, Mr Lock was paid his basic salary and the commission he had earned on sales contracts which he had entered into in the preceding weeks. He did not generate any sales during his leave, so he did not earn commission and consequently his salary was less in the months after his holiday. Taking a holiday therefore resulted in a loss of income for him.
As a result, Mr Lock brought a claim for his ‘lost’ holiday pay to an employment tribunal. The tribunal decided to refer the case to the Court of Justice of the European Union (CJEU) to seek an answer on whether commission should be included in holiday pay and, if so, how it should be calculated.
Case ruling on holiday pay and commission
The CJEU made clear that employees should not be worse off because of taking holiday, arguing that if workers felt that they would be, they could become reluctant to take leave which would undermine the purpose of the Directive.
They ruled that commission should be included in the calculation of holiday pay as it is “directly linked to his work in the company”. While Mr Lock’s commission varied on a monthly basis, the CJEU found it was regular enough to be regarded as part of his normal monthly pay.
Impact of the case on the UK legislation
Following the CJEU’s decision, the case was referred back to the Tribunal. The Tribunal then decided in this case that wording could be inserted into the UK’s Working Time Regulations 1998 (WTR) so that commission payments must be taken into account when calculating entitlement to holiday pay.
Employees are therefore now entitled to rely on this judgment and the Tribunal’s interpretation of the WTR. The Tribunal did not, however, answer how Mr Lock’s holiday pay should be calculated to include his commission payments.
British Gas appealed against the Tribunal’s decision. In 2016 The Court of Appeal dismissed the appeal, and upheld the Employment Tribunal’s finding that commission should be included in holiday pay for the first four weeks of holiday under the working time regulations. British Gas was refused permission to submit a further appeal to the Supreme Court.
Calculating commission to be included in holiday pay
It is worth highlighting that commission must be factored into holiday payments for the 4 weeks of statutory annual leave required under European law, but there is currently no requirement to factor in commission for the additional 1.6 weeks of statutory annual leave provided under UK law, or for any additional contractual annual leave allowance.
In order to calculate the commission owed, the current rule for employees on a variable salary is to calculate the average rate over the previous 52 weeks of employment.
If you’d like to discuss holiday pay or any other employment law issues do not hesitate to contact me on Annabel.email@example.com