EMPLOYERS are facing a multi-million pound compensation bill after a European court ruled workers who earn commission on sales are entitled to full holiday pay.
The landmark legal case means companies can no longer pay staff who earn commission only their basic salary when they take annual leave, and must top up their wages based on the amount of extra income they usually earn.
Legal experts have warned firms should brace themselves for a wave of claims as the ruling completely changes the way commission-based staff are paid.Claims could be backdated by at least five years.
The ruling is the result of a case brought against British Gas by an employee identified in legal papers as Mr Z J Lock.
Mr Lock took annual leave for which he got his basic pay only, and did not get any payment for commission. This meant he was losing more than half of his average earnings during annual leave.
The Court has now ruled paying people in this fashion could stop them taking time off, and ruled it unlawful under the Working Time Directive.
Neil Carberry, the Confederation of British Industry's director for employment and skills, warned that claims from across the UK could be worth "hundreds of millions".
He said: "Changing the current rules, where holiday pay is linked to basic pay, could lead to considerable financial costs for business - reaching at least the hundreds of millions of pounds.
"With our economy still recovering, the current regulations we have in the UK must be protected, and firms must be reassured they will not be exposed to large retrospective liabilities despite having followed UK law.
"Any change risks damaging our strong labour market - posing a serious risk to jobs."
Katy Wedderburn of law firm MacRoberts LLP said the rulingwould have a massive impact. She said the number of people affected means the value of claims could be more than the £40 million paid out by store John Lewis last year when it miscalculated what some staff should have been paid for working on Saturdays.
She said: "There are many workers out there who have not been paid commission while they have been on holiday and have just received basic pay. Firms are going to have to look very closely at this because people are going to start bringing claims … the unions are on to this and we could see large class-action suits."
John Lee of law firm DWF said companies should start adjusting to the ruling now to avoid higher costs later. He said: "This increases the costs of paid annual leave, particularly in sectors where commission and bonus payments represent a significant part of overall remuneration … Employers would be well advised to review their current policies and practices now in order to avoid potentially mounting liabilities."
Mr Lock's case was taken to court on his behalf by the union Unison. It will now be sent back to the Employment Tribunal to decide how much he is entitled to.
Unison General Secretary Dave Prentis said the decision will help workers across the European Union to argue they should get their normal pay, including any commission they normally get, for periods of annual leave.
Ralph Nathan of British Gas said the firm is reviewing the judgment in detail. He added: "We're already examining the issue raised by the Lock case as part of a wider review of employee incentives, and working with trade union representatives to help us design our future employee incentive schemes."