EAT confirms that holiday pay should include commission

In a long awaited judgment, the Employment Appeal Tribunal has this week confirmed that British legislation on annual leave does, as it stands, require commission to be paid in holiday pay. This is a significant judgment for employers whose employ workers where commission commonly makes up a large part of incentivised pay schemes. All workers who earn commission, in both public and private sector, are affected by this judgment. The European Court of Justice had already decided that the European law on annual leave requires that commission should be included, however, the question remained regarding whether British legislation also required it. The Employment Appeal Tribunal has now said it does. Whilst this judgment has not officially changed the law, it certainly strengthens the argument that workers should get more holiday pay when they earn commission. The case centred around a salesman whose pay included a large element of commission but was only paid his basic pay when he was on holiday. The claim progressed to the European Court who ruled that, where workers’ pay varies every pay day because of commission earned, their holiday pay should be based on an average of their earnings including commission. Employers may now need to look at new ways of calculating holiday pay for workers who earn commission. Average pay received will need to be calculated but the judgment did not contain any indication as to the correct period over which to calculate the average. The law states that a period of 12 weeks should be used, however, this may not provide a true representation of pay when commission is only paid, for example, at fixed intervals only once or twice per year. Reportedly, thousands of claims by commission workers had been put on hold pending this decision. Depending on the exact facts, these claims are now likely to be successful. Back pay liability is restricted to two years but an analysis of individual holiday records is required to pin point exact liability which could be less than first thought. Separately to the back pay issue, employers must also consider changing their future pay practices. This is the second judgment on holiday pay which has hit employers in recent times. A similar case resulted in the ruling that employers must include certain types of overtime pay in holiday pay, again requiring a pay average to be calculated.