As you may recall from our earlier blog, Mr Lock was a sales person for British Gas and, like many people in sales, his remuneration consisted of two main components: basic salary and commission. His commission was paid in arrears on a monthly basis, based on sales achieved.
Mr Lock's holiday pay was calculated on his basic salary only. While Mr Lock received commission payments during annual leave for sales made during previous weeks, during periods of annual leave when he did not undertake work, he would not generate any commission. Therefore, his pay would potentially be lower in the weeks following his return from leave than it would be if he had not taken any leave.
The ECJ was concerned that this might deter workers, like Mr Lock, from actually taking leave, particularly if commission represented a sizeable proportion of their total remuneration. The ECJ concluded that, as commission was intrinsically linked to the tasks Mr Lock was required to carry out, it should therefore be factored into the holiday pay calculation.
As regards how to calculate the amount of commission payable during annual leave, the ECJ left this question for the national courts to decide.
In its judgment, the ECJ makes reference to calculating the amount of commission on an "averaging" basis. However, the ECJ said it was for the national courts or tribunals to assess whether using an average calculated over a particular reference period as a method to calculate the commission payable to a worker in respect of their annual leave achieved the objectives of the Working Time Directive. In other words, an employment tribunal would need to satisfy itself that the method used by an employer to calculate the commission payable during annual leave does not leave the worker financially worse off and potentially deter the worker from taking leave.
As the law currently stands in the UK, the reference period to calculate "average" pay is a 12 week period. However, as the Advocate General noted in his earlier opinion, using a longer reference period may be more appropriate when it comes to calculating an "average" in relation to commission payments. Determining the appropriate reference period and amount which is representative of the commission that a worker would otherwise have earned (and which will not leave the worker financially worse off if he takes leave) will depend on a number of factors, including the nature of the work, how the commission is earned and the regularity of the payments.
If you have any queries regarding the potential impact that this case might have on your current commission and holiday pay arrangements, please do not hesitate to speak to any member of the team.