Should holiday pay include commission payments?
Please note, legislation has been updated in regards to holiday calculations since this article was written, effective for holiday years starting on or after 1 April 2024. If you’re a Moorepay client, please contact us if you need guidance. Otherwise, please see this article on the changes for more information.
If your employees earn commission for achieving their targets at work, you need to know if you have to factor this into their payroll. Here are the details.
Do employers have to pay commission as part of their employees’ holiday pay?
In short, yes, commission does count towards holiday pay. Acas guidance details that, by law, holiday pay must include payments linked to doing tasks required in your contract, which includes any commission employees receive.
This is because by law, your employer must make sure employees can take the amount of holiday you’re entitled to during the annual leave year (if they want to). This legislation was put in place because if an employee receives considerably less pay when they’re on holiday (for example, if they weren’t paid their usual commission), it would discourage them from taking their annual leave.
If these commission payments are variable, which we can assume most will be, the guidance on how to calculate this is not set in written in legislation. However, arguably, best practice is to calculate the average amount of commission the employee received over the last year that they worked, and apply that figure to the calculation.
Don’t forget that holiday pay must also include payments related to professional or personal status, such as length of service, seniority or professional qualifications, and other payments, for example regular overtime payments. Employers need to be aware that a failure to include such payments may leave themselves open to a claim or where applicable a succession of unlawful deductions from wages claims.
Find out more on Acas’ website.
The context behind the legislation
In 2016, the Employment Appeal Tribunal (EAT) confirmed employers have to pay commission as part of holiday pay. After a four-year legal battle, one man managed to secure more holiday pay for thousands of workers. The Employment Appeal Tribunal ruled in favour of a salesman who received only his basic pay while on holiday, despite making most of his money from commission.
The recent EAT decision influenced the outcome of thousands of other pending holiday cases, forcing employers to review their previous holiday pay allowances in relation to elements such as overtime and commission.
The landmark case
Here’s a quick summary of the long-running case of Lock v British Gas Trading Ltd, which was first brought to tribunal in April 2012:
- Mr Lock, a British Gas salesperson, had a basic salary plus commission
- When he took annual leave, he would receive basic pay, which was considerably less than his usual salary
- Lock argued that this discouraged him from taking annual leave and lodged a claim with an employment tribunal, which referred the case to the European Court of Justice (ECJ)
- The ECJ concluded that because his commission was directly linked to the work he carried out, it must be taken into account when calculating holiday pay
- The case was then referred back to the UK tribunal to apply its ruling to UK law
- The subsequent tribunal decision, last March, found in favour of Mr Lock, and applied an extra clause to the Working Time Regulations 1998.
The decision…
The EAT dismissed the appeal and the key findings were:
- Commission payments should be included in the calculation of holiday pay in respect of the four weeks’ annual leave under regulation 13
- It is permissible – and indeed necessary – to imply words into the Working Time Regulations 1998 to comply with EU law.
- Parliament’s intention must have been to comply with EU law. Domestic legislation can therefore be interpreted in a way which conforms to EU law on holiday pay;
- The EAT followed the decision in Bear Scotland (which concerned guaranteed overtime). If Bear Scotland was wrongly decided then the Court of Appeal must decide that, not the EAT.
What should you pay
Unhelpfully, what the EAT did not determine (or indeed the original Tribunal) was the reference period employers must use to calculate holiday pay. The ECJ said this was a matter for national courts to decide by taking an average over a period they considered to be representative. Therefore the issue of how such payments should be calculated remains uncertain.
It is likely that where payment reference is in dispute, an employment tribunal may approach the issue on a case-by case basis.
