Employers generally support commission-based earnings, as they naturally benefit from this type of remuneration system: employees are paid only insofar as they generate turnover for the company's benefit and therefore shoulder part of the salary themselves. However, the fact that all salary components must be taken into account when calculating leave pay is often overlooked.
Leave pay calculations must take into consideration an employee's holiday, sickness, bank holiday and other paid absences; however, such calculations can be difficult for employers of commission-based employees. Further, such payments, which are legally prescribed remuneration components, are regularly inaccurate in companies without a proper calculation system; employers often get it wrong out of ignorance.
The problem of miscalculated leave pay has been seemingly hidden for a long time; however, it can now be found on many company auditors' agenda. Further, non-compliant employers can face potentially damaging consequences, including high back payment obligations or even criminal charges where intent can be proven.
According to the Federal Leave Act, every German employee is entitled to receive pay during their holiday. Holiday pay is calculated based on an employee's average earnings of the 13 weeks before the first day of leave. In principle, all remuneration components that an employee has received in return for their work during this 13-week period should be included in the average earnings. The standard case of an employee with a constant monthly salary requires little calculative effort: the employee will simply receive their monthly salary as holiday pay.
Cases where an employee's salary fluctuates are far more complex – for instance, where a sales employee receives commission or business transactions they mediate themselves. According to both Federal Labour Court and European Court of Justice(1) case law, commission must be taken into account when calculating holiday pay (ie, the average total commission earned in the thirteen weeks before the start of a holiday must be paid during the holiday).
Little room for flexible solutions
Contractual agreements with an employee according to which commission is not to be included in holiday pay are inadmissible and unenforceable.
Moreover, the 13-week reference period generally applies if the amount of commission, viewed over the year, fluctuates considerably and/or was significantly above or below the usual average 13 weeks before the start of the holiday. Consequently, there can be significant differences in holiday pay, which may not favour the employee in question. While such random results are generally accepted by the German labour courts, the Federal Labour Court has acknowledged that the 13-week period may be replaced by broader reference periods (eg, 12 months), depending on the individual circumstance of the commission payment system in place. In that case, the average commission of the previous 12 months would be used to calculate the employee's holiday pay. However, this approach, which clearly deviates from written law, must always be reasonable and never applied arbitrarily. At the same time, it will be subject to a court review in cases of dispute, so it leaves little room for individual and flexible calculation methods.
Similar calculation requirements apply for other types of paid leave. For example, the Continued Pay Act regulates sickness and bank holiday pay. Average commission payments must also be considered for these types of paid leave. Other paid absences (eg, garden leave) follow the same principle.
Avoiding negative consequences
An accurate method for calculating leave pay must consider an employee's holiday, sickness, bank holiday and other paid absences; however, this can be burdensome for a company's HR department if its employees earn fluctuating rates of commission. While a certain amount of bureaucratic effort is inevitable, a well-thought-out system and properly trained HR officials will help to minimise complications and avoid negative consequences such as additional payment demands, company audits and criminal charges.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
Endnotes
