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Posted 4 June 2014
by Stephen Jennings

Should employers include contractual commission in the calculation of an employee’s holiday pay?

Yes, said the European Court of Justice this week.

Their view is that if commission is not taken into account, then the employee may be at a substantial financial disadvantage because he will only receive his basic pay while on holiday. Because basic pay may be substantially lower than what he would ordinarily earn, this may discourage him from taking his holiday entitlement, which would conflict with the purpose of the Working Time Directive.

The Court did not comment on how to calculate holiday pay to reflect commission, instead it will be up to the English courts to decide. However, as the rate of an employee’s commission can vary from week to week, it is likely that the courts may take an average of commission based on the preceding twelve weeks before any annual leave is taken. To do so would bring the calculation in line with casual workers and the latest requirement from the courts to include paid overtime into the holiday pay calculation.

This view is likely to cause a number of practical difficulties – not least as it assumes employees would generate the same number of sales during their holiday period as they did when at work. This will not be the case for many employees, who will no doubt take holidays at times when sales are usually lower. This means that employees who take holiday immediately after a peak selling period may be overcompensated for their leave.

While, for the time being, the European Court of Justice decision does not give employees an immediate right to claim higher holiday pay, it is almost inevitable that this will happen once the decision is reflected in a UK court decision. It is then an open question whether or not employees will be able to claim arrears for holiday pay in previous years which didn’t reflect their loss of ability to earn commission.

If you pay employees on a commission basis, either wholly or partly, then you will need to think about revising how you calculate holiday pay to include commission payments. One option adopted by some parks is to pay low-level commission based on all sales made by the sales team (i.e. an individual employee is paid whether or not he is on holiday at the time the sale was made) – if you do this, current arrangements may still suffice.

For now, it is a matter of waiting to see how the UK courts interpret the European Court of Justice ruling – so watch this space!

For queries or more information on what to include when calculating your employees holiday pay, contact the employment team on telephone 01392 207020 or by email employment@tozers.co.uk.

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About the author

Stephen Jennings

Partner

Partner in the litigation department specialising in employment law, he is the relationship manager for many of the firm's employment clients