Case update (2): Holiday pay & commission

What do we already know?

Calculating holiday pay has been made much more complex over the past few years. The Court of Justice of the European Union (CJEU, formally  known as the ECJ), EAT and subsequent Tribunal decisions in Bear Scotland Ltd v Fulton and Lock v British Gas have meant that payments such as commission and bonuses, should now be included in holiday pay. For further detail please see our updates here.

Most recently we updated you in our recent Newsflash Holiday pay & commission on the Court of Appeal’s decision in British Gas Trading Ltd v Lock and another [2016], available here.

The Court of Appeal has upheld the EAT’s decision 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 Working Time Regulations 1998 (WTR) and the WTR should be interpreted to conform with the requirements of EU law.

What’s new?

In our Newsflash Holiday pay & commission we promised you further detail on the Court of Appeal’s decision in British Gas Trading Ltd v Lock and another [2016] so here it is…

Summary: Can and should the Working Time Regulations 1998 (WTR) be interpreted to provide that holiday pay must include relevant commission payments?

Yes, says the Court of Appeal in British Gas Trading Ltd v Lock and another [2016], available here.

Facts: Please see our March 2016 Newsletter Case update (1): Holiday pay & commission for the background facts and summaries of the previous CJEU and Tribunal decisions on this case.

The EAT held that:

1. the WTR can and should be interpreted in line with the requirements of EU law (the Working Time Directive (WTD)) and CJEU’s ruling (which said that the WTD requires workers to receive their “normal remuneration” during annual leave, which includes any component “intrinsically linked” to the worker’s contractual duties);
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 (for further detail on the Bear Scotland decision see our November 2014 Newsletter Case update (1): Holiday pay and news). In summary the EAT in Bear Scotland decided that (1) non-guaranteed, non-voluntary payments should be reflected in holiday pay (2) it is possible to read UK law (the WTR) to give effect to the EU law requirement to include non-guaranteed, non-voluntary overtime in the calculation for holiday pay of EU law and (3) a requirement to include overtime and other payments in holiday pay apply only to the basic EU right to 4 weeks’ holiday; and
3. it was for the Court of Appeal to determine whether Bear Scotland is correct.

British Gas did then appeal the EAT’s decision to the Court of Appeal, arguing that Bear Scotland was wrongly decided and it was not possible to read the WTR to conform with the WTD.

The Court of Appeal upheld the EAT’s decision that the WTR can and should be interpreted in line with the requirements of the WTD.

The Court concluded that the WTR in any event properly implements the WTD in nearly all respects but currently fails to address either commission or non-guaranteed overtime payments.  The Court decided that this was more likely to be an oversight in drafting the WTR than a deliberate exclusion.  As a result, the Court was able to interpret the WTR as providing that Mr Lock was entitled to have his commission earnings reflected in his holiday pay.

However, the vital question of precisely how commission (and other elements of remuneration) should be included in the holiday pay calculation was deliberately left unanswered by the Court. Although the Court of Appeal approved the Tribunal’s decision in Lock v British Gas to imply a 12 week reference period over which earnings should be averaged in order to calculate holiday pay, the Court of Appeal did not comment on whether this was the correct reference period in all cases.

Instead the Court stated that “There may also be questions as to what, in any particular case, is the appropriate reference period for the calculation of the pay“.

This leaves considerable uncertainty and suggests that the reference period may differ, not just according to the element of normal pay under consideration (commission, overtime or even bonus, as to which it remains unclear whether it is normal remuneration) but also according to the particular pay arrangements of the employer, or even individual employee.

Implications: It is understood that British Gas has sought leave to appeal to the Supreme Court and given the importance and complexity of this case it is likely to be granted. In this respect it remains a case of watch this space…

However, in the meantime, although the Court of Appeal’s decision does not unfortunately progress this long-running saga much further, we do at least have a Court of Appeal authority confirming that the WTR can be read to conform to the WTD in respect of commission payments. 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.

Before taking action we would encourage you to seek advice from our Menzies Law team on 0117 325 0526, particularly given the remaining uncertainties surrounding the precise method of calculating holiday pay (e.g. how to draw the line between what is ‘normal remuneration’ and what is not and which reference period to use).