Case update (1): Holiday pay & commission

We updated you in our February Newsflash Holiday pay and commission that the EAT has heard the appeal in Lock v British Gas and here are the further details as promised…

Summary: Should sums earned by way of commission be included in the calculation of holiday pay for the first four weeks of an employee’s holiday under Regulation 13 of the Working Time Regulations 1998?

Yes, says the EAT in Lock v British Gas available here.

Facts:  Mr Lock was a salesman selling commercial products for British Gas. He received commission on a delayed basis, weeks or even months after he negotiated a particular deal. On average, his commission payments made up about 60% of his monthly earnings. Mr Lock took two weeks holiday over Christmas and New Year 2011-2012. His pay for December/January was not lower than usual, as he still had earlier commissions ‘coming through’.  However, he argued that by taking holiday he was deprived of the opportunity to earn future commission and therefore his overall earnings were lower. Mr Lock brought a claim in the Tribunal, arguing that the reduced income amounted to a breach of the Working Time Regulations 1998 (WTR).

The Tribunal referred the case to the CJEU (formerly the ECJ) which accepted Mr Lock’s argument and held that his holiday pay should include a commission element.

CJEU decision

The CJEU held that where a worker’s remuneration includes contractual commission, determined with reference to sales achieved, EU law (the Working Time Directive) precludes a national law that calculates statutory holiday pay based on basic salary alone. If commission payments are not taken into account, the worker will be placed at a financial disadvantage when taking statutory annual leave; no commission will be generated during the holiday period. In such circumstances, the worker might be deterred from exercising the right to annual leave. This would be contrary to the EU law’s purpose.

The case was remitted back to the Tribunal following the CJEU’s decision and, just as significantly, following the EAT’s decision in Bear Scotland (see our November 2014 Newsletter Case update (1): Holiday pay and news).

Tribunal decision

The Tribunal had to determine the extent to which the WTR could be read consistently with EU law, and if not, whether words could and should be added in, interpreting those regulations so that the calculation of a week’s pay conformed with EU law. If not, holiday pay claims against private sector employers could not succeed until the law is changed by the Government.

The Tribunal held that UK law can be interpreted so as to bring it into line with CJEU’s ruling. This could not be done by reading the law consistently with EU law (because the two laws were opposites). However, the UK law could be so interpreted by adding the following words to the WTR:

“… a worker with normal working hours whose remuneration includes commission or similar payments shall be deemed to have remuneration which varies with the amount of work done….”

The Tribunal found that the correct approach had been taken by the EAT in Bear Scotland (see above) which had held in that case that the WTR can and should be interpreted to conform with EU law.

The Tribunal therefore held that employers (including in the private sector) must bring commission payments into account when calculating holiday pay in respect of the four week entitlement under the WTR. British Gas appealed against the Tribunal’s decision to the EAT.

EAT decision

The EAT upheld the Tribunal’s decision and dismissed British Gas’s appeal.  The EAT held that:

1. the WTR can and should be interpreted in line with the requirements of the EU law (the Working Time Directive) and CJEU’s ruling; and
2. the Tribunal was right to adopt the Bear Scotland approach as it was not possible to distinguish the facts of the case from the EAT’s decision in Bear Scotland (see our November 2014 Newsletter Case update (1): Holiday pay and news). The concept of “normal working hours” applies to both non-guaranteed overtime and to commission.

As a general principle, the EAT will follow its earlier decisions unless an exception to that rule applies. Here there was no question that Bear Scotland was “manifestly wrong”, one of the possible exceptions. Whether the circumstances of the case are sufficiently exceptional to justify a departure from a previous decision depends on all the facts, but here there had been very full argument in Bear Scotland on the key question of whether domestic legislation can be interpreted in a way which conforms to EU law.

The EAT considered that it is for the Court of Appeal to determine whether Bear Scotland is correct. British Gas have been granted leave to appeal to the Court of Appeal.

Implications:  (Re)confirmation that sums earned by way of commission should be included in the calculation of holiday pay for the first four weeks of an employee’s holiday under Regulation 13 of the WTR. The WTR can and should be interpreted to conform to the requirements of EU law.

However, unfortunately, there are still a number of unanswered questions.  For example, the EAT’s judgment does not clarify how commission or non-guaranteed overtime should be factored into the calculation of holiday pay. To date:

1. the Employment Rights Act 1996 uses a reference period of the last 12 weeks to calculate pay, where pay varies according to the amount of work done or the time of work;
2. the Advocate General suggested a reference period of 12 months;
3. the CJEU held that national courts must determine a reference period that they “consider to be representative”; and
4. the Tribunal has suggested that the reference period for calculating holiday pay should be the period of 12 weeks immediately before the holiday (excluding any weeks where no remuneration was paid for any reason).

Although the prospect of the EAT’s decision being appealed means that this area of law is still uncertain, it is likely that the Court of Appeal will uphold the current position. As such, it has never been more important for employers to audit their holiday pay arrangements, identify areas of risk, and plan how to address these.

Employees will no doubt feel more optimistic about issuing holiday pay claims, which could in turn give rise to significant costs for unprepared employers. However, it is worth employers remembering that any claims brought on or after 1 July 2015 are limited to deductions where the relevant date of payment fell within two years before presentation of the claim (see our December 2014 Newsflash Holiday pay claims – government action).