Lock (Advocate General's opinion) [2013] EUECJ C-539/12 (05 December 2013)

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(Request for a preliminary ruling from the Employment Tribunal, Leicester (United Kingdom))

(Social policy – Organisation of working time – Consultant receiving a basic salary with monthly commission payments based on sales made and the number of sales contracts entered into – Entitlement to payment of commission during annual leave)

1. The questions referred for a preliminary ruling by the Employment Tribunal, Leicester (United Kingdom) relate to the interpretation of Article 7 of Directive 2003/88/EC of the European Parliament and of the Council of 4 November 2003 concerning certain aspects of the organisation of working time, (2) which reads as follows:

1. Member States shall take the measures necessary to ensure that every worker is entitled to paid annual leave of at least four weeks in accordance with the conditions for entitlement to, and granting of, such leave laid down by national legislation and/or practice.

2. The minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated.’

2. Those questions are raised in proceedings between Mr Lock and his employer, British Gas Trading Ltd and Others (‘British Gas’), concerning the manner in which the amount of remuneration that employee may claim during his paid annual leave is to be calculated. More specifically, the issue raised by this case is whether or not, when the remuneration received by a worker comprises a fixed component and a variable component, the latter must form part of the remuneration to which a worker is entitled in respect of his paid annual leave.

I – The dispute in the main proceedings and the questions referred for a preliminary ruling

3. Since 2010 Mr Lock has been, and continues to be, employed by British Gas as an Internal Energy Sales Consultant. His role is to seek to persuade business clients to purchase British Gas’s energy products.

4. His remuneration consists of two main elements. The first is basic pay and the second commission.

5. Commission, like the basic pay, is paid monthly. The amount of commission fluctuates, inasmuch as it is calculated by reference to the sales actually achieved. It is, therefore, not based upon the amount of work put in but on the outcome of that work, that is to say, the number and type of new contracts that were entered into by British Gas. Commission is paid, not at the time that the work which generates the commission is done, but several weeks or months after the sales contract with British Gas is entered into.

7. During the period covered by his annual leave, Mr Lock’s remuneration comprised his basic pay and the commission he had earned during the previous weeks. In the course of the year to which Mr Lock’s claim relates, he received an average monthly commission payment of GBP 1 912.67. During the month in which he took the annual leave that is the subject of his claim, he received commission in the sum of GBP 2 350.31. He was also paid his basic pay at a rate of GBP 1 222.50 per month. (3)

8. Given that Mr Lock did not carry out any work during his period of annual leave, he was not able to make any new sales or follow up on potential sales during that period. Accordingly, he was not able to generate commission during that period. As that circumstance had adverse effects on the salary Mr Lock received during the months following his annual leave, he decided to bring a claim before the referring tribunal for outstanding holiday pay in respect of the period from 19 December 2011 to 3 January 2012.

9. In the light of that claim, the Employment Tribunal, Leicester, decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:

– a worker’s annual pay comprises of basic pay and commission payments made under a contractual right to commission;

– the commission is paid by reference to sales made and contracts entered into by the employer in consequence of the worker’s work;

– commission is paid in arrears and the amount of commission received in a given reference period fluctuates according to the value of sales achieved and contracts entered into and the time of such sales;

– during periods of annual leave, the worker does not undertake any work that would entitle him to those commission payments and accordingly does not generate commission in respect of such periods;

– during the pay period which includes a period of annual leave, the worker is entitled to basic pay and will continue to receive commission payments based on commission earned earlier; and

– his average commission earnings over the course of the year will be lower than they would be if the worker had not taken leave, because, during the leave period, he will not have undertaken any work that would entitle him to commission payments,

does Article 7 of [Council] Directive 93/104/EC [of 23 November 1993 concerning certain aspects of the organisation of working time (OJ 1993 L 307, p. 18)], as amended by Directive 2003/88 …, require that Member States take measures to ensure that a worker is paid in respect of periods of annual leave by reference to the commission payments he would have earned during that period, had he not taken leave, as well as his basic pay?

(3) If the answer to question 1 is “Yes”, what principles (if any) are required to be adopted by Member States in calculating the sum that is payable to the worker by reference to the commission that the worker would or might have earned if he had not taken annual leave?’

10. The doubts entertained by the referring tribunal as to the correct interpretation of Article 7 of Directive 2003/88 where remuneration comprises a fixed component and a variable component would appear, in particular, to stem from the judgment of the Court of Appeal (England & Wales) (Civil Division) of 27 November 2002, Evans v Malley Organisation Ltd (T/A First Business Support). (4) In a situation similar to that at issue in the present case, the claimant employee argued that his holiday pay ought to have been based on his average income, in order to include both his basic pay and his average earnings from commission. The Court of Appeal (England & Wales) (Civil Division) rejected the employee’s argument. It held that the employee’s remuneration did not vary with the amount of work done and that therefore section 221(2) of the Employment Rights Act 1996 applied. (5) Accordingly, that court held that the employee was entitled to be paid only his basic pay in respect of his annual leave period and that therefore he was not entitled to be paid a sum equivalent to his average income from commission for periods when he was on paid annual leave.

11. I shall reply first of all to the main question, which is whether or not, in a situation such as that at issue in the main proceedings, in which the remuneration received by a worker comprises both basic pay and commission the amount of which is paid by reference to sales made and contracts entered into by the employer in consequence of that worker’s own work, Article 7 of Directive 2003/88 requires such commission to be included in the basis for calculating the remuneration that is payable to that worker in respect of his period of paid annual leave.

12. In my view, effective protection of the right to paid annual leave calls for an affirmative answer to that question.

13. I note that, according to settled case-law, the entitlement of every worker to paid annual leave must be regarded as a particularly important principle of European Union social law from which there can be no derogation. (6) That right is, moreover, expressly laid down in Article 31(2) of the Charter of Fundamental Rights of the European Union. (7)

14. It is established that the purpose of the entitlement to paid annual leave is to enable the worker to rest and to enjoy a period of relaxation and leisure. (8)

15. The holiday pay required by Article 7(1) of Directive 2003/88 is intended to enable the worker actually to take the leave to which he is entitled. (9)

16. As the Court held in Williams and Others, the wording of Article 7 of Directive 2003/88 makes no specific reference to the remuneration to which a worker is entitled during his annual leave. (10)

17. It is therefore for the Court, taking into account the importance of the right to paid annual leave and the objective of Article 7 of Directive 2003/88, to determine what must be included in the basis for calculating the remuneration to which workers are entitled during their periods of paid annual leave.

18. In that connection, the Court has previously had occasion to state that the expression ‘paid annual leave’ in Article 7(1) of Directive 2003/88 means that, for the duration of ‘annual leave’ within the meaning of that directive, remuneration must be maintained and that, in other words, workers must receive their normal remuneration for that period of rest. (11)

19. As the Court held, Directive 2003/88 treats entitlement to annual leave and to a payment on that account as being two aspects of a single right. The purpose of the requirement of payment for that leave is to put the worker, during such leave, in a position which is, as regards remuneration, comparable to periods of work. (12)

20. The Court therefore concluded from the foregoing that remuneration paid in respect of annual leave must, in principle, be so determined as to correspond to the normal remuneration received by the worker. It also follows, according to the Court, that an allowance, the amount of which is just sufficient to ensure that there is no serious risk that the worker will not take his leave, will not satisfy the requirements of EU law. (13)

21. According to the Court, when the remuneration received by the worker is made up of several components, the determining of that normal remuneration and, consequently, of the amount to which that worker is entitled during his annual leave requires specific analysis. (14)

22. The situation addressed by the Court in Williams and Others was that of airline pilots receiving remuneration composed of a fixed annual sum and of variable supplementary payments linked to the time spent flying and to the time spent away from base.

23. Analysis of that situation enabled the Court to lay down several criteria for including or excluding, as appropriate, certain components of the remuneration to which a worker was entitled when on paid annual leave.

24. The general rule laid down by the Court with regard to remuneration comprising several components is that, although the structure of the ordinary remuneration of a worker is determined, as such, by the provisions and practices governed by the law of the Member States, that structure cannot affect the worker’s right to enjoy, during his period of rest and relaxation, economic conditions which are comparable to those relating to the exercise of his employment. (15)

25. Applying that general rule, the Court held that any inconvenient aspect linked intrinsically to the performance of the tasks the worker is required to carry out under his contract of employment and in respect of which a monetary amount is provided which is included in the calculation of the worker’s total remuneration, such as, in the case of airline pilots, the time spent flying, must necessarily be taken into account for the purposes of the amount to which the worker is entitled during his annual leave. (16)

26. By contrast, according to the Court, the components of the worker’s total remuneration which are intended exclusively to cover occasional or ancillary costs arising at the time of performance of the tasks which the worker is required to carry out under his contract of employment, such as costs connected with the time that pilots have to spend away from base, need not be taken into account in the calculation of the payment to be made during annual leave. (17)

27. The existence of an intrinsic link between the various components making up the total remuneration of the worker and the performance of the tasks he is required to carry out under his contract of employment would seem, therefore, to be a decisive criterion for including those various components in the remuneration payable to the worker during his paid annual leave. The various allowances a worker may claim during his paid annual leave must therefore not only be directly linked to the performance of the tasks he is required to carry out under his contract of employment, but also have a certain degree of permanence.

28. That assessment of the existence of an intrinsic link between the various components making up the total remuneration of the worker and the performance of the tasks he is required to carry out under his contract of employment must, according to the Court, be carried out on the basis of an average over a reference period which is judged to be representative and in the light of the principle established by the case-law cited above, according to which Directive 2003/88 treats entitlement to annual leave and to a payment on that account as being two aspects of a single right. (18)

29. To that criterion of an intrinsic link the Court has added another criterion, referring to its case-law concerning the remuneration of pregnant workers temporarily transferred to another job, or granted leave, for the duration of their pregnancy. (19) Thus, all the components of the remuneration which relate to the personal and professional status of the worker must be maintained during that worker’s paid annual leave. (20) For example, allowances relating to his or her seniority, length of service or professional qualifications.

30. In the light of that case-law and the trend which is apparent from the criteria hitherto defined by the Court, I consider that commission, such as that received by Mr Lock by reference to the sales contracts entered into by British Gas in consequence of the work he has carried out himself, must be included in the remuneration to which that worker is entitled during his paid annual leave.

31. The commission in question is directly linked to the work normally carried out by Mr Lock under his contract of employment. Moreover, such commission does in fact constitute remuneration for the work Mr Lock has carried out himself. The commission is therefore directly linked to that worker’s own work within his undertaking.

32. In addition, although the amount of commission may fluctuate from month to month depending on the results obtained by Mr Lock, such commission is none the less permanent enough for it to be regarded as forming part of that worker’s normal remuneration. In other words, it constitutes a constant component of his remuneration. A consultant who carries out his tasks satisfactorily within British Gas will receive commission each month in addition to his basic pay.

33. In my view, an intrinsic link does therefore exist between the commission received each month by a worker such as Mr Lock and the performance of the tasks he is required to carry out under his contract of employment. That link is all the more evident because the amount of commission is, by definition, calculated as a proportion of the results obtained by that worker in terms of contracts entered into by British Gas.

34. In my view, failure to take commission into account in the remuneration that is payable to a worker in respect of his paid annual leave is capable of deterring him from exercising his right to such leave, which is contrary to the objective of Article 7 of Directive 2003/88. Such a deterrent is all the more likely to exist in a situation such as that at issue in the main proceedings, in which commission represents on average over 60% of the remuneration received by Mr Lock.

35. To accept such an outcome would mean that a worker such as Mr Lock, deterred from exercising his right to paid annual leave and therefore continuing to work, would in fact receive an allowance in lieu of a minimum period of paid annual leave, something strictly prohibited by Union law. Article 7(2) of Directive 2003/88 provides that the minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated. (21)

36. British Gas, objecting to commission such as that normally received by Mr Lock being included in the remuneration payable to him during his paid annual leave, denies that failure to take such commission into account would have the effect of deterring such a worker from exercising his right to paid annual leave. It argues that during his period of annual leave Mr Lock continues to receive remuneration, comprising a fixed component and a variable component, due to the fact that the payment of commission in respect of a sale concluded previously may coincide with the period of paid annual leave. Since he actually receives his normal remuneration during that period a worker such as Mr Lock is not therefore deterred from exercising his right to paid annual leave.

37. The premiss of that argument is misleading. It is true that ostensibly a worker such as Mr Lock can receive his normal remuneration during his leave. However, that by no means does away with the deterrent caused by the failure to pay commission in respect of the period during which that worker is exercising his right to paid annual leave.

38. The commission scheme put in place by British Gas means that there is necessarily a time-lag between the event which generates the commission – sales achieved, contracts entered into – and the time the commission is paid. It is that time-lag which explains how a worker can receive the variable component of his remuneration during his period of paid annual leave. However, in such a situation, that variable component of his remuneration is paid not in respect of the period of leave but solely as a consequence of contracts entered into previously. That failure to pay the variable component of the worker’s remuneration in respect of the period of annual leave will have adverse effects on the amount of remuneration received by that worker during the months following that leave period. A worker such as Mr Lock will thus find himself, as a consequence of taking annual leave, in a less favourable situation than if he had worked. Exercise of his right to paid annual leave will mean he suffers a financial disadvantage which, if deferred, is none the less real.

39. When there is no system allowing the variable component of the remuneration to be maintained at a certain level in respect of the period of paid annual leave, that worker may therefore indeed be deterred, due to the fall in subsequent income that may result from his inactivity, from exercising his right to such leave.

40. At the hearing, British Gas stressed, first, that each worker is set an annual income target, based on predicted sales and, secondly, that the rate of commission paid to workers in respect of sales achieved already takes into account the fact that workers will not be able to generate commission during their periods of paid annual leave.

41. Those two arguments are not such as to call into question the need to include commission in the basis for calculating the remuneration that is payable to a worker such as Mr Lock in respect of his period of paid annual leave.

42. In the first place, setting an annual income target based on a worker’s performance, which is normal in the commercial sector, is not equivalent to setting in advance a fixed-rate allowance that will be received by every worker irrespective of the sales he achieves. It is therefore pointless to request the Court in the present case to consider whether or not that type of allowance should be taken into account in the context of the remuneration to which a worker such as Mr Lock is entitled in respect of his period of paid annual leave.

43. In the second place, with regard to the second argument put forward by British Gas, namely, that British Gas takes periods of paid annual leave into account in advance in calculating the rate of commission, I would observe, first, that, in my view, the information available to the Court is not sufficient to show that a worker such as Mr Lock has received an increase in the rate of commission designed to cover his holiday pay.

44. Next, and in any event, I doubt that such a scheme would be consistent with what the Court held in Robinson-Steele and Others. In that judgment, the Court called in question the practice whereby employers incorporated holiday pay in the hourly or daily rate of pay of workers (what is known as ‘rolled-up holiday pay’). More specifically, the Court held that Article 7 of Directive 93/104 precludes the payment for minimum annual leave within the meaning of that provision from being made in the form of part payments staggered over the corresponding annual period of work and paid together with the remuneration for work done, rather than in the form of a payment in respect of a specific period during which the worker actually takes leave. (22) That finding is based on the rule, which I recalled above, that the minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated. According to the Court, that prohibition is intended to ensure that a worker is normally entitled to actual rest, with a view to ensuring effective protection of his health and safety. (23) In other words, such a prohibition seeks to ensure that workers actually take their paid annual leave.

45. In the light of that case-law, and so far as British Gas’s statement on that point can be verified, a scheme that consists in including holiday pay in the rate of commission paid to workers is, in my view, incompatible with Article 7 of Directive 2003/88 in so far as that article seeks to afford workers the right to actual rest, inasmuch as it is likely to lead to situations in which workers are prompted not to take leave in order to increase their remuneration.

46. For all those reasons, I propose that the Court’s answer to the referring tribunal should be that, in a situation such as that at issue in the main proceedings, in which the remuneration received by a worker comprises, on the one hand, basic pay and, on the other, commission the amount of which is paid by reference to sales made and contracts entered into by the employer in consequence of the worker’s own work, Article 7 of Directive 2003/88 requires such commission to be included in the basis for calculating the remuneration that is payable to that worker in respect of his period of paid annual leave.

47. In view of the answer which I therefore propose the Court should give to the main question referred by the referring tribunal, it is appropriate to examine the latter’s last question, which concerns, in essence, the method and rules enabling commission to be included in the basis for calculating the remuneration that a worker such as Mr Lock must receive during his paid annual leave.

48. In my view, it is for the referring tribunal to determine what method and rules are appropriate for attaining the objective set out in Article 7 of Directive 2003/88, on the one hand, by interpreting its national law (24) in a manner consistent with that objective and, on the other, by taking into consideration elements deriving from practice or from similar situations. Whatever the specific procedure adopted, I shall merely say that to take into account the average amount of commission received by the worker over a representative period, 12 months for example, (25) would appear to me to be an appropriate solution.

49. In the light of all the above considerations, I propose that the answers to the questions referred for a preliminary ruling by the Employment Tribunal, Leicester, should be as follows:

In a situation such as that at issue in the main proceedings, in which the remuneration received by a worker comprises, on the one hand, basic pay and, on the other, commission the amount of which is paid by reference to sales made and contracts entered into by the employer in consequence of the worker’s own work, Article 7 of Directive 2003/88/EC of the European Parliament and of the Council of 4 November 2003 concerning certain aspects of the organisation of working time requires such commission to be included in the basis for calculating the remuneration that is payable to that worker in respect of his period of paid annual leave.

It is for the referring tribunal to determine what method and rules are appropriate for attaining the objective laid down in Article 7 of Directive 2003/88.

3 – It is clear from this information that commission constitutes more than 60% of Mr Lock’s total remuneration.

5 – That provision reads: ‘Subject to section 222, if the employee’s remuneration for employment in normal working hours (whether by the hour or week or other period) does not vary with the amount of work done in the period, the amount of a week’s pay is the amount which is payable by the employer under the contract of employment in force on the calculation date if the employee works throughout his normal working hours in a week.’

6 – See, inter alia, Case C-282/10 Dominguez [2012] ECR I-0000, paragraph 16.

7 – See, inter alia, Case C-155/10 Williams and Others [2011] ECR I-8409, paragraph 18.

8 – See, inter alia, Joined Cases C-350/06 and C-520/06 Schultz-Hoff and Others [2009] ECR I-179, paragraph 25.

9 – Joined Cases C-131/04 and C-257/04 Robinson-Steele and Others [2006] ECR I-2531, paragraph 49.

24 – That is mainly Regulation 16 of the Working Time Regulations 1998, section 2 of which refers to sections 221 to 224 of the Employment Rights Act 1996 for the purpose of determining the amount of a week’s pay.

25 – I would point out in that regard that the Commission Scheme, which sets out the principles and policy for payment of commission within British Gas, provides that where a sales consultant goes on maternity leave, paternity leave, or adoption leave he or she will receive, at particular times, an amount of commission which is calculated by taking an average of all commission earned during the twelve months immediately prior to the start of the leave.

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Court of Justice of the European Communities (including Court of First Instance Decisions)