Coping with commission and other allowances in holiday times

The European Court (ECJ) has ruled that commission must be taken into account in determining the rate of pay enjoyed by employees while on holiday.

The Court was concerned that a worker may be deterred from taking annual leave if he or she suffered financial disadvantage from doing so.

On average, British workers take only three quarters of their annual leave entitlement. Mail online

Certain commission schemes (where earnings are reduced while the employee is on holiday and so not making sales), can disadvantage employees who take holiday. Therefore such schemes do not comply with the Working Time Regulations (WTR).

Employers who continue to run such schemes, without adjustment, run a number of risks, notably the risk of a claim for back-pay perhaps going back a number of years.

There is a further suggestion (following the principle of not losing out through taking holiday) that any regular allowance or regular overtime should also be included in determining holiday pay. The Employment Appeal Tribunal (EAT) has yet to decide on overtime but a ruling is to be expected soon (possibly the end of July 2014).

Where commission or overtime forms a regular part of pay then it should be included in the calculation of the holiday pay rate.

The remedy for employers would seem to be to create a situation where there is no loss to employees (either immediately or over the year) from failing to take at least four weeks entitlement (as set out in the WTR ) to holiday. There are several options:

  1. Work out the commission or overtime paid to an employee over the twelve weeks previous to the date the holiday is commenced and use that rate to determine the pay on the day or week the holiday is taken. Care should be taken if commission or overtime has a seasonal component. This approach would be likely to meet the ECJ expectations and reduce the risk of a back-pay claim, but it would in effect be a pay rise. See also Note 4. below.
  2. Do this calculation, but pay the commission or overtime on the first four weeks holiday only. Again this would be likely to meet the ECJ expectations and reduce the risk of a back-pay claim. But it would also, in effect, be a pay rise and some extra administration (and explanation to employees ) would be needed.
  3. Create a holiday pay “bank” whereby a percentage of each month’s commission is deducted and used to enhance appropriately the first four weeks holiday that the employee takes. There might need to be a reconciliation at the end of the holiday year although pay-in-lieu must not form part of that.                                                                                                                                                               This would also be very likely to satisfy ECJ expectations because it would ensure that employees do not gain by foregoing holiday. Putting it in place now should reduce the risk of back pay claims.
  4. Do nothing. There is a possibility that nothing will happen. It is worth noting that the CBI is urging government to protect UK businesses from this ‘unacceptable’ ECJ ruling.                                                                                                                                                                 The case which the ECJ heard in May has been referred back to an Employment Tribunal for them to determine how holiday commission should be paid. You might also want to wait until we hear their approach. Equally, so far as overtime is concerned, you may want to wait for the EAT ruling. But if you do nothing and are forced into acknowledging the ECJ ruling, eg by a past employee making a claim, then you will be wrong-footed, viewed as a poor employer. You will also be wide open to back pay claims. Many thought PPI claims would not succeed but they have in fact created a whole new industry.

The aim here is to set out some options for employers. We cannot recommend one course of action over another, as legal decisions are unpredictable. But the intention here is to enable decisions to be made that could reduce future liability, while being aware of the risks.

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