Posted on: 06 June 2014
How did that happen? The ECJ ruling on holiday pay and commission
Bonus | Annual Leave | Commission | ECJ | Holiday pay |
I have to admit to feeling a little anxious about the recent decision from the European Court of Justice (ECJ) ruling that holiday pay should also include a payment for commission that would normally have been earned.
Of course, my heart understands this decision.If you have a large proportion of pay as commission, you are bound to feel some financial hardship when you take annual holiday. The principle behind holiday pay is that it should reflect ‘normal pay’ as much as possible so that employees are not reluctant to take holiday. Many will see that including commission is therefore the fair and ethical thing to do.
But are we forgetting that the fundamental principle behind variable pay is that it varies? It pays more when value-add activities are delivered, and less when they are not. How does a business that directly links commission to sales carry on paying commission in the absence of any sales? The answer can only be through adding complexity to the scheme design.
And employees would be foolhardy to equate this decision to an increase in earnings. The money will have to come from somewhere and for some businesses the cost implications are quite significant. We will certainly see many schemes being redesigned deliver slightly lower payments during 47 weeks of work in order to fund five weeks of holiday. Actions such as headcount reductions, lower basic pay rises and reduced benefits provisions could also be taken to fund increased costs.
For me, this decision brings disruption to businesses and the consequences far outweigh the benefits as it:
- breaks the link between results and payment
- is open to manipulation, particularly where there are peaks and troughs in work (i.e. taking holiday after a buoyant ‘reference period’)
- will bring complexity to commission scheme design
Of course, we now have to wait and see how the decision will be implemented in the UK and any changes to the UK Working Time Regulations (1998) as a result. But, given the principle is likely to affect all types of variable pay including overtime and allowances, and historic claims could stretch back years, the more cautious employers will be taking action now.
Certainly an interesting one to watch.
