The European Court of Justice (ECJ) has ruled that the EU law requires a worker’s statutory holiday pay to take commission payments into account: it should not be based solely on basic salary (Lock v British Gas Trading Ltd, C-539/12, 22 May 2014). The case is not over yet, but its outcome is potentially costly for employers with workers who are entitled to commission. Emma Perera from our UK member firm Lewis Silkin LLP explains the potential consequences. Originally posted on the Ius Laboris Knowledge Base: www.globalhrlaw.com

1. Implications of ECJ’s British Gas
holiday pay ruling
Publication Date: 12 June 2014 | Author(s): Emma Perera Member
Firm(s): Lewis Silkin LLP Country: United Kingdom
The European Court of Justice (ECJ) has ruled that the EU law requires a
worker’s statutory holiday pay to take commission payments into account:
it should not be based solely on basic salary (Lock v British Gas Trading
Ltd, C-539/12, 22 May 2014 – judgment available here). The case is not
over yet, but its outcome is potentially costly for employers with workers
who are entitled to commission.
Mr Lock, an energy salesman for British Gas, is paid a basic salary and a
sales commission on a monthly basis. His sales commission makes up
around 60 per cent of his remuneration package. When he took two
weeks’ annual leave in December 2012, he was paid his basic salary and
also received commission from previous sales that fell due during that
period.
Mr Lock obviously did not generate any new sales while he was on
holiday, which meant that in the period afterwards he suffered a reduced
income through lack of commission. He brought an employment tribunal
claim asserting that this amounted to a breach of the UK Working Time
Regulations 1998 (WTR).
The legal background
This case highlights a simmering conflict between UK and European law
as to how holiday pay should be calculated. The EU Working Time
Directive (WTD) states that workers have the right to at least four weeks’
paid annual leave, but does not say how holiday pay should be
assessed. However, three years ago the ECJ ruled that the WTD required
holiday pay to be based on “normal remuneration”, including any
payments linked intrinsically to the performance of the worker’s tasks
(Williams v British Airways plc [2011] IRLR 948).
The WTD is implemented in the UK by the WTR, under which workers are
entitled to 5.6 weeks’ annual leave. Such holiday is paid in line with the
rules on calculating a “week’s pay” in the Employment Rights Act 1996
(ERA). Under those rules, workers like Mr Lock who earn a basic salary
plus commission are entitled to holiday pay based on their basic salary

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alone.
The tribunal hearing Mr Lock’s case decided it should make a reference to
the ECJ for a definitive ruling on the EU law position applicable to the
circumstances of his case. The UK government intervened to support
British Gas’ view that, as Mr Lock received not only basic pay but
commission that fell due while on annual leave, there had been no breach
of the WTD.
What has the ECJ decided?
Applying the principle of “normal remuneration”, the ECJ decided that Mr
Lock’s sales commission was directly and intrinsically linked to the
performance of the tasks required under his contract of employment as a
salesman. Accordingly, under the WTD, the commission must be taken
into account in calculating his statutory holiday pay.
The ECJ noted that Mr Lock did receive commission while on annual leave
and that the financial disadvantage occurred as a result of his inability to
generate commission during his holiday period, which did not take effect
until some weeks afterwards. Nonetheless, the ECJ considered this was
contrary to the WTD’s objectives because the worker might be deterred
from exercising the right to annual leave.
The ECJ also said that the method for calculating pay during annual leave
to take into account commission must be left for national courts and
tribunals to determine in line with ECJ case law and the WTD.
Mr Lock’s case will now go back to the employment tribunal, which will
have to consider whether national law - as set out in the WTR and the
ERA “week’s pay” provisions - can be interpreted in line with the ECJ’s
ruling.
How should employers respond?
Clearly, the ECJ’s ruling may have a major financial impact on employers
who pay commission to their salespeople. They may end up having to
change the way they calculate holiday pay for such workers to include
commission and could face retrospective claims relating to previous
periods of annual leave.
One limiting factor is that the ECJ’s ruling would only apply to the four-
week annual leave entitlement under the WTD and not the additional 1.6
weeks provided by the WTR. Moreover, it should not affect contractual
holiday pay over and above the statutory minimum.

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That aside, we suggest it is premature for employers to be changing their
holiday pay arrangements or entering into negotiations about backdated
compensation for employees. It is not clear how the tribunals will interpret
the ECJ decision – in Mr Lock’s case and perhaps other cases - and it is
likely to be the subject of further appeals to the higher courts. Employers
should keep a close watching brief on further developments. Some may
wish to seek legal advice at this stage to understand the potential risks
and financial exposure and any options available.
This is particularly so in light of the complicating factor that Mr Lock’s claim
does not directly concern his holiday pay, which did include
commission. Rather, it focuses on the fact that his remuneration was
subsequently affected by his inability to generate commission while on
leave. It remains to be seen how the tribunal will wrestle with this issue
and how far it will feel able to interpret the “week’s pay” rules to award Mr
Lock additional compensation.
One potential outcome is that the average amount of commission received
by a worker will in future have to be determined over a reference period in
order to determine holiday pay. The ECJ’s Advocate General, who gave a
preliminary opinion in Mr Lock’s case, suggested a 12-month reference
period might be appropriate. However, in a section of the ERA “week’s
pay” rules which does not apply to Mr Lock, a 12-week reference period is
used – so that may be a more natural fit with national law.
This underlines that it is far too speculative at the present time to
determine what specific changes to holiday pay arrangements might
ultimately be required to comply with the ECJ’s ruling.
Much the same applies to the separate but related issue of whether
overtime payments should be included in the calculation of holiday
pay. The position in relation to overtime is due to be explored in two cases
listed for hearing by the UK Employment Appeal Tribunal in July. There is
a possibility those cases could also be referred to the ECJ as well, so it
does not appear likely that the questions hovering over calculation of
holiday pay will be conclusively resolved anytime soon.

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Originally posted on the Ius Laboris Knowledge Base:
www.globalhrlaw.com
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