The Employment Appeal Tribunal has confirmed that British legislation on annual leave requires commission to be paid in holiday pay.
The long awaited judgment is a significant one for employers whose staff earn commission, particularly where it makes up a large part of their incentivised pay schemes. All workers who earn commission, both in the public and private sectors, will be affected by this decision.
The European Court of Justice had already decided that, under European law on annual leave, commission should be included.
The remaining hurdle was whether British legislation also required it. The Employment Appeal Tribunal has now confirmed that it does.
This judgment has now set a precedent that employees who earn commission should have this factored into the calculation of their holiday pay.
The test case involved 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 employees’ 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.
“Depending on the exact circumstances, 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.
“Having sorted out any claims for back pay, any employers affected by this ruling need to consider changing their future pay practices.”
She added: “This is not the first time that holiday pay has caught out some employers. A similar recent case resulted in a ruling which meant that employers must include certain types of overtime pay in holiday pay, again requiring a pay average to be calculated.”
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