Dreadlock holiday pay

10cc were a great band – from a decade of great bands of course – “Dreadlock holiday” an iconic track and I don’t like cricket, no no, I love it. So what a joy to be able to reference this title to a very significant employment case reported last week. How come? Well the pun starts here: (1) the case is Lock v British Gas Trading Limited (2) it is all about holiday pay and (3) employers will dread its implications.

Underpinning the European Directive on working time are the twin notions that workers must take holidays, for the benefit of their health and sanity, and that they should be paid for them. If they are not paid properly, that is at the rate they earn when they are at work, they may be discouraged from taking holidays – to the detriment of their well-being. And that is why employers are not generally permitted to pay workers for holidays in lieu of the workers actually taking the time off unless the contract has been terminated and periods of untaken holiday have to be compensated.

Since the implementation of the Directive by the Working Time Regulations  the amount of holiday pay has always been linked to the concept of the week’s pay – but what if the week’s (or four times a week i.e. a month’s) pay usually includes a substantial element of commission which is results, e.g. sales, based?  It is hardly an uncommon situation. Estate agents, car salespersons and perhaps even the majority of those workers in sales in every field are incentivised by the prospect of commissions.

In Mr Lock’s case 60% of his income was derived from sales of commercial gas contracts. He was paid commission for the period when he was on holiday but that commission was in respect of sales made at an earlier stage. Whilst on holiday he would not be making any sales and so in the future he would not receive any commission for the holiday period because he made no sales during that time. The key question was therefore whether in calculating holiday pay account should be taken of commission that he have earned during the period when he was on holiday had he not been on holiday. The Leicester ET thus posed one of the questions to the European Court in these terms “does Article 7… require that the Member States take measures to ensure that a worker is paid in respect of periods of annual leave by reference to the commission payments he would have earned during that period, had he not taken leave, as well as his basic pay?”

The Advocate General’s opinion delivered on 5 December 2013 was that Article 7 did require such commission to be included when calculating the remuneration due to the employee in respect of the paid holiday period. Emphasis was placed on the requirement that a worker receives his normal remuneration for the period of their holiday: “The purpose of the requirement of payment for that leave is to put the worker, during such leave, in a position which is, as regards remuneration, comparable to periods of work.” Unsurprisingly that opinion has now been followed in the judgment of the Court just promulgated.

Despite the commission varying from month to month as would be expected, it was permanent enough to be regarded as a normal part of the salary. But the ECJ did not spell out how to calculate commission in these circumstances, leaving that conundrum for the domestic jurisdictions to decide.  The permutations are considerable. Suppose the salesman earns a basic of £20,000 p.a. and about £1,000 per month commission. As he lawfully has 4 weeks holiday his annual commission is £11,000 p.a. But if he did not take holidays, his commission would be £12,000 – so imagine the response from employers when holiday pay is calculated on £32,000 not £31,000 – rewarding the employee for sales he has not made and increasing employee costs with no equivalent uplift in income.

If the calculation is to be based on average earnings (including commission) for a period prior to the holiday, on the face of it, quite fair and straightforward, how is the spike in commissions to be dealt with in some industries – such as new car sales just after the new registration numbers come on stream?  Banning employees from taking holidays at particular times may prove difficult. Existing case law and the Directive may govern how the solution is to be arrived at but legislation will almost certainly be required. So let’s anticipate the amendments to the Working Time Regulations – and that may not come too soon. Not exactly an employer friendly change – and in an election year? Until then, plentiful opportunities exist to deploy a range of arguments at the ET and appellate levels.

Meanwhile…

1. Costs to employers will rise
2. Large scale claims from employees may be anticipated
3. Amendment to Working Time Regulations to include appropriate and fair methods of calculation will be forthcoming
4. Cases will proceed through the ET/EAT to CA to produce guidance on how to calculate commission
5. Uncertainty will prevail