This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

Employment Update: Holiday pay and commission
27 March 2015

Employment Update: Holiday pay and commission

Earlier this week, the Employment Tribunal handed down its decision in relation to a case involving holiday pay that will affect any employer who pays commission to their workers.

The Tribunal has confirmed that the Working Time Regulations should be read in such a way as to compensate workers for the effect that a holiday may have on their pipeline of commission.  This came as no great surprise, as the ECJ had heard the case last year and confirmed that this was the approach that should be taken.  We reported the ECJ's decision here

Guidance on Calculating Holiday Pay

The Tribunal has now given some guidance as to how employers facing a similar situation should go about determining holiday pay.  It has held that holiday pay (including commission) should be calculated by reference to the worker's average weekly pay over the previous 12 weeks.  However, the worker is only entitled to this enhanced pay in respect of the basic four weeks' holiday due under the Working Time Directive, whereas the remainder of holiday can be paid at basic salary only. 

It would appear from previous case law that it is not open to a worker to designate which holiday falls into the category of Directive holiday (as opposed to the additional 1.8 weeks holiday available under the Working Time Regulations, or any contractual holiday over and above either of these), but it is likely that this will be the first four weeks' holiday in any year.  However, whether employers feel that it is worth the additional administrative headache of calculating two different types of holiday pay remains to be seen.

Areas of Uncertainty

While this decision does give some clarity as to how an employer should handle holiday pay, it leaves open a number of questions.  First, this case involved an employee who earned commission on a very regular basis.  There was little question that it formed part of his 'normal remuneration'.  The position is possibly less clear when someone earns the commission less frequently – for example, on a quarterly or annual basis.  The case also dealt with someone who did not, it appears, receive a discretionary annual bonus in addition to his commission.  If a worker is entitled to both commission and a bonus, and they decide to go on holiday within three months of receiving the annual bonus, they will enjoy a windfall as the bonus payment would be taken into account when calculating the average week's pay.   Further, by simply taking an average of the previous twelve weeks, this may not be an accurate reflection of the worker's normal remuneration and could invite further challenges.

What do employers need to do?

It is likely that employers may now need to consider how they go about paying commission.  Existing arrangements may be hard to change, as they are likely to be contractually binding, and it will be an unpopular move to refuse to grant holiday in circumstances where an employee has recently earned significant commission (not least as they may be in need of a break).  However, it may be worth ensuring that commission is paid 'little and often' to reduce the potential for employees to receive overly generous payments.

This case follows the Employment Appeal Tribunal's decision from last autumn, which held that overtime should be included in holiday pay in certain circumstances.  That case also gave some helpful guidance as to how far back employees would be able to claim in respect of shortfalls in holiday pay. Here is our analysis of the overtime case.  In the meantime, the government has pushed through legislation which will limit back dated holiday pay claims to two years in relation to claims lodged after 1 July 2015.

For more information, or to discuss any other employment issues, please contact Joanna Blackburn.