Malta: I’m Taking My Paid Annual Vacation Leave. Pay Me My Lost Commission!

With reference to CJEU (ex ECJ) Case C-539 of the 22^nd May 2014

Employers and employees often assume that an employee's entitlement during a period of annual vacation leave is limited purely and simply to the contracted basic pay, exclusive of other allowances or commission which would otherwise be earned during a normal period of work.

Wrong assumption.

It is now an established principle, applicable also directly in Malta, that if an employee is normally paid in part by commission based on sales, then remuneration payable to the employee during vacation leave must, almost certainly, include an amount representing commission for that period. Indeed, other allowances other than basic pay may also have to be calculated for purposes of remuneration during vacation leave.

* * *

The Organisation of Working Time Regulations (S.L.452.87 which transpose the provisions of EU Directive 2003/88 into the Laws of Malta) establish the entitlement of paid annual leave for all workers calculated on the normal hours of work (excluding overtime) over a 17-week reference period. These Regulations however do not define what the 'pay' during vacation leave is to comprise, and thus for instance whether seniority-based allowances are to be paid, or whether variable remuneration generally based on commission from sales is to be taken into account.

This latter lacuna is exactly what the Court of Justice of the European Union ("CJEU") has sought to clarify in the recent judgement C-539/12 Z.J.R. Lock V British Gas Trading Ltd of the 22^nd May 2014 considering that the EU Directive also failed to specify what 'paid leave' is to comprise.

At the outset of this decision, the CJEU reiterated that 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 derogations and whose implementation by the competent national authorities must be confined within the limits expressly laid down by EU Directive 2003/88. With reference to CJEU Case C-214/10 KHS, the CJEU emphasised that this right is expressly guaranteed by Article 31(2) of the Charter of Fundamental Rights of the European Union.

Taking this into account and referring to prior CJEU decisions (mainly C-131/04 and C-257/04), the CJEU highlighted that although Article 7 of the Directive does not give any express indication as regards the remuneration to which a worker should be entitled during a period of annual leave, the worker is entitled to receive his 'normal remuneration' for that period of rest. This general principle is applicable also to an employment context in Malta.

Moving on, the CJEU established an additional principle relating to remuneration during annual leave for workers who are normally paid by basic salary and commission based on sales.

Summarily, the Court declared that although the remuneration received by the worker for the annual leave period in terms of the national law (in this case UK Law) included both his basic salary and sales commission achieved during the weeks preceding his vacation leave, this nonetheless placed the employee at a disadvantage. The CJEU found that in these circumstances the employee does not generate any sales during the period of annual leave and therefore for a period after the taking of leave, the employee would receive a reduced remuneration comprising his basic salary only, which in this specific case was, on average, only 40% of the employee's normal remuneration.

In coming to this conclusion the CJEU commented that the employee "may be deterred from exercising his right to annual leave, given the financial disadvantage which, although deferred, is nonetheless genuinely suffered by him during the period following that of his annual leave".

The CJEU held that such a reduced remuneration is liable to deter the employee from actually exercising his right to take leave, which in itself is contrary to the objective of the Directive in spite of being a consequence arising after the period of annual leave.

Therefore the Court concluded that EU Law precludes any national legislation and practice which provides for a worker's remuneration during annual leave to comprise exclusively of basic salary. Conversely, any "inconvenient aspect" of remuneration which is "linked intrinsically" to the performance of the tasks which the worker is required to carry out under his contract and in respect of which a monetary amount is provided and included in the calculation of the worker's total remuneration must necessarily be taken into account for the purposes of calculating the amount to which the worker is entitled during his annual leave. This is to be assessed on the basis of rules and criteria set out by the case-law of the CJEU, thus on the basis of an average over a reference period which is considered representative under national law. Furthermore, the CJEU reaffirmed that any allowances relating to seniority, length of service and professional qualifications must also be maintained during such period, this however to the exclusion of remuneration intended exclusively to cover occasional or ancillary costs.

Indeed, the principles established by the CJEU are to be considered as directly binding and enforceable to any employment context in Malta. Yet the consequences of such a decision and the interpretation of the principle in view of the Maltese Organisation of Working Time Regulations is yet to be tested. For instance, should one refer to the 3 month period referenced in Article 36(13) of the EIRA (Chapter 452, Laws of Malta) which applies to determining wages paid by commission in the context of termination of employment? One asks, on the basis of this reasoning, is the exclusion of payment for overtime justifiable if such worked overtime is linked intrinsically to the performance of tasks?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.