Back in May 2014, the European Court ruled that holiday pay must include commission. Last week, the UK employment tribunal clarified how that change applied in the UK. We have the details.

Firstly, in other news, the Consumer Rights Act aims to simply legislation. And there’s also a range of new legislation coming in on 5 April.

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Holiday pay must include commission

The judgment in the important employment tribunal decision which deals with the inclusion of commission in holiday pay has now been published.

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Key dates for your diary

5 April sees a whole raft of new legislation:

• Paternity and Adoption Leave (Amendment) Regulations 2014
• Paternity and Adoption Leave (Amendment) (No. 2) Regulations 2014
• Work and Families Act (Northern Ireland) 2015
• Social Security and Tax Credits (Miscellaneous Amendments) Regulations 2015
• New rate of statutory maternity, paternity, adoption and shared parental pay

Handling holiday pay and commission

Following a ruling by the employment tribunal in the case of Lock vs British Gas, details have now been provided about how commission should be included when calculating holiday pay. The clarification has been applied through an extra subsection to the Working Time Regulations 1998 to ensure they comply with the Working Time Directive.

This affects all employers who pay commission on sales or other activity. It means that any worker should be paid annual leave based on the amount of commission they would have earned if they hadn’t taken the holiday. This means that future wages are not detrimentally affected by taking leave.

What’s changing?

The change is not to the fact that commission must be included - that was made clear by the European Court of Justice (EJC) in May 2014. The change comes with the detail provided by the employment tribunal on how this should be applied to holiday pay calculations in the UK.

The Working Time Regulations will now include the following section:

"Payment in respect of periods of leave

16 (1) A worker is entitled to be paid in respect of any period of annual leave to which he is entitled under regulation 13, at the rate of a week's pay in respect of each week of leave.

(2) Sections 221 to 224 of the 1996 Act shall apply for the purpose of determining the amount of a week's pay for the purposes of this regulation, subject to the modifications set out in paragraph (3).

(3) The provisions referred to in paragraph (2) shall apply:

(a) as if references to the employee were references to the worker;

(b) as if references to the employee's contract of employment were references to the worker's contract;

(c) as if the calculation date were the first day of the period of leave in question; and

(d) as if the references to sections 227 and 228 did not apply.

(e) as if, in the case of the entitlement under Regulation 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purpose of section 221."

The employment tribunal didn’t provide any guidance about the reference period when calculating commission to be included in holiday pay, so there may be further hearings to clarify this.

What about other forms of payment?

The tribunal didn’t discuss bonuses or other forms of renumeration. Overtime has already been covered by the Employment Appeal Tribunal (EAT) decision.

Can employees make claims for backdated pay?

Yes. Employees must make a claim within three months of receiving holiday pay for the claim to be valid.

The Deduction from Wages (Limitation) Regulations 2014 mean that any claims made on or after 1 July 2015 will be limited. Any claims made before then could be backdated as far back as the introduction of the Working Time Regulations in 1998.

What do I need to do from now on?

To comply with the ruling, you’ll need to look at your holiday pay calculations and ensure that commission is included. It applies even when the commission is based on achieving certain objectives, such as bringing in sales.

The ruling only applies to four weeks' holiday pay and not to the additional 1.6 weeks granted under the UK Working Time Regulations.

You’ll need to work out which of your employees are affected and how much their holiday pay will now be under the new legislation.

Our support article helps you understand how to make these changes in your software.