By Richard Smith, Head of Employment Law, Croner

A recent Court of Justice of the European Union (CJEU) ruling on holiday pay and commission could have a significant impact on employers.

In current domestic law, workers with normal working hours but varying pay are not entitled to commission within their holiday pay. However, the Lock v British Gas Trading Limited [2013] decision goes completely against this and could see employers having to hand out huge amounts in back pay.

The CJEU held that, for employees with normal working hours, contractual commission payments, which are intrinsically linked to the performance of a task, should be taken into account when calculating a week’s pay for holiday purposes. The reasoning behind this is that, if commission is not included in holiday pay, then employees may be deterred from taking time off.

At present, as this is only a European decision, it is only binding on public and quasi-public sector employees. However, it will eventually apply to all employees, as the Government will almost certainly amend domestic legislation in line with the judgment.

What does this mean for employers?
In light of the CJEU, public and quasi-public sector employees are entitled to holiday that is calculated on the basis of both basic pay and commission payments where (i) the commission is a contractual entitlement and (ii) it is intrinsically linked to the performance of the contract. These rights are directly enforceable against the employer.

For private sector employees, the Working Time Regulations 1998 and provisions of section 221 of the Employment Rights Act 1996 remain applicable. Employees who work normal hours are not entitled to holiday pay that includes commission payments but holiday pay based upon their basic rate of pay.

If you are a public or quasi-public sector employer you will need to comply now with the judgment of the Lock case. For private sector employers, domestic law does not state that commission needs to be included for the purposes of calculating holiday pay. However, the law is not settled in this area and could change. There are four different options employers could choose to take at the moment:

1. Ignore the issue until it is fully clarified by the domestic courts and/or legislation.
2. Change your policy to incorporate the payment of holiday pay which includes commission payments moving forward and negotiate with employees or unions regarding back pay.
3. Change your policy to incorporate the payment of holiday pay which includes commission payments moving forward, but do not communicate this widely so that eventually claims for back pay will become time barred.
4. Be up front with employees and unions, explain the current circumstances and negotiate an arrangement to resolve issues of the position moving forward and back pay