New EU holiday pay ruling – what are the implications?

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The Court of Justice of the European Union (CJEU) has recently ruled that workers should be paid commission while on leave as part of their holiday pay. This change means that Employment tribunal judges, and therefore UK employers, are now bound to follow the CJEU’s decision.

When will this apply?

Well first of all, this is already up and running. The rule kicks in where an employee’s salary is a combination of both a fixed amount (basic salary) and a regular variable amount (bonus or commission) that is ‘intrinsically linked’ to their role; for instance if their role receives a sales-related commission payment.

Why has this changed?

The case that has brought about this ruling is Lock vs British Gas. Lock has argued that the commission he earns is intrinsically linked to his role as a salesman. This was agreed by the CJEU thus his holiday pay should include a payment equal to the average level of commission he would ordinarily have earned had he been working during his holiday period.

This ruling has huge implications for businesses where the payment of sales commission is the norm and so far, the case seems to only affect the 20 annual leave entitlements under the Working Time Directive and not the full 28 day entitlement in the UK under the Working Time Regulations.

This change means employers are faced with higher holiday pay costs as well as the risk of claims for historical under-payment of holiday pay. These claims could potentially be quite substantial! Employers should be advised that claims can only be made to a tribunal within three months of the last underpayment, so any employees who were last underpaid more than three months ago, and who have not yet presented a claim, will already be out of time.

Biggest concerns for the employer?

Some of the biggest issues employers are going to face is how to calculate the amount of commission the employee should be paid during their holiday period and how to prevent them abusing this payment system with the timing of their holidays. This will be especially important where sales are affected by seasonal trends. For example, if their holiday pay is based on their average sales/earnings over the 12 weeks immediately prior to their holiday, this could result in employees benefitting greatly from taking their holiday immediately after a busy period.

What should employers do next?

Firstly, employers might want to review all of their current commission structures, commssion plans and related documentation as well as considering a strategy for minimising their exposure to claims and put a value on that exposure.

Secondly, employers might want to investigate whether their existing payroll systems are capable of calculating average historical commission payments or entitlements so they do not have to make manual calculations when taking role-related commission into account when calculating future holiday pay.

How might employers react to the CJEU’s decision?

Some employers might consider reducing the rate of commission paid to employees due to the additional amount which will now need to be paid to them in the form of holiday pay. This would result in the employee receiving the same overall amount of commission as is currently being paid but not provide additional costs to the employer, so neither lose nor gain additional monies. However, employers would need to ensure that they were contractually able to adopt this approach for it to be a lawful.