Holiday pay and commission - how does one affect the other?

There have been a number of recent cases on holiday pay and how payments of commission and overtime may influence what an employee is paid when they are on holiday. We have written a separate blog on the issue of holiday and overtime which we invite you to also read.

For many years, companies have tended to pay employees their normal weekly rate when they have been on holiday. This has meant that many staff who may receive a low basic wage and large sums of commission are significantly affected financially when they take holiday leave. Indeed, this may mean that staff choose not to take all of their holiday entitlement.

The problem
The main problem with holiday pay is that the government who introduced the Working Time Regulations did not set out how a week's pay should be calculated. This led to employers relying upon the definition in the Employment Rights Act of the normal rate of pay or, if this varies, the average pay over a twelve week period.

Lock v British Gas
This case is now the main authority for holiday pay and commission. Mr Lock was a salesman. More than half of his salary was commission.  He took his case to Europe and successfully argued that his holiday pay should take into consideration his commission payments. The Court stated that if a person earns far less in wages when they are on holiday, they will be less likely to take holiday. This defeats the purpose of employment legislation guaranteeing a certain amount of holiday entitlement to employees of member states.

Where does this now leave us?
With immediate effect, all employers should be calculating holiday pay in accordance with the Lock decision and therefore including commission in such payments. The Lock case has been referred back to the UK Tribunals to decide whether commission should be calculated over the 12 weeks before the holiday is taken or the preceding 12 months. The European Court seems to prefer the 12 month approach but employers may wish to adopt the 12 week approach until matters are final clarified in 2015. 
Employers must however act now and cannot simply wait for the UK Tribunal to decide whether the relevant period is 12 weeks or 12 months.

This blog sets out the law as we see it in relation to holiday pay and commission. It is not intended to be specific legal advice in relation to an employer or employee and must not be relied upon a such. If in doubt any person should always seek legal advice.

We have written a separate blog on holiday pay and overtime and hope you will take a look at that as well. We love to read your comments upon our blogs. Please feel free to therefore leave your thoughts and comments.

Chiltern Solicitors is a specialist employment law practice which offers a wide range of services to both employers and employees. We are particularly proud of our HR service for employers called Chiltern HR. For more details call our team on 01582 439795 or email info@chilternsolicitors.co.uk

Thanks for reading.