Lock decision: Holiday Pay must include commission confirms Court of Appeal

The Court of Appeal has today given its long awaited judgment in the holiday pay case of British Gas Trading v Lock.

The Court of Appeal has today given its long awaited Judgment in the holiday pay case of British Gas Trading v Lock.

The Court confirmed that employees who are paid commission must have lost commission taken into account in some of their holiday pay.

The Court of Appeal has followed the earlier decisions of the Employment Appeal Tribunal in this case, and in the important related case of Bear Scotland Ltd v Fulton and others, holding that it is possible to interpret the Working Time Regulations 1998 (WTR) in a way that conforms with European Law.  

The facts

This case has been heard by the European Court of Justice (ECJ), the Employment Tribunal (ET), the Employment Appeal Tribunal (EAT) and now the Court of Appeal.

60% of Mr Lock’s average take-home pay was commission. The rest was basic pay. When he took annual leave, he was paid basic salary and any commission which he had earned in previous weeks which happened to be paid during that time. He was not paid extra for the lost ability to earn results-based commission whilst he was off. Accordingly, there was a disincentive for him to take leave because he could not generate any new commission whilst he was on holiday (and therefore received a reduced income in the months following his leave).

Mr Lock brought an Employment Tribunal claim arguing that this reduction in income was a breach of the WTR.

The road to the Court of Appeal

When this case was heard by the ECJ back in March 2014, it determined very clearly that a worker must be paid in respect of periods of annual leave by reference to the commission payments he would have received in that period, had he not taken holiday. In March 2015, the ET confirmed that this decision applied directly in the UK to all employers.

In November 2014, the EAT held, in the case Bear Scotland Ltd v Fulton and others  that non-guaranteed overtime should be included in the calculation of statutory holiday pay. In reaching this decision, the EAT read an extra subsection into the WTR to make the legislation comply with European Law.

When the EAT heard the employer’s appeal in British Gas Trading v Lock in February 2016 it followed the decision in Bear Scotland and altered the wording of the WTR to give effect to the earlier Judgment of the ECJ  and include commission payments in holiday pay.           

The Court of Appeal decision

Arguments at the Court of Appeal primarily involved the question of whether or not the WTR should be altered in this way. British Gas argued that the ‘interpretive exercise’ carried out by the ET and EAT went too far and went ‘against the grain’ of the legislation. It argued that, in previous cases, extra words have only been ‘read in’ to legislation to correct drafting errors or fill obvious gaps in the law, rather than to extend the meaning of the domestic statute.

British Gas also argued that the EAT was incorrect to follow the principles Bear Scotland (which dealt only with ‘non-guaranteed’ overtime pay) in a case involving commission payments.

Further, it submitted that Bear Scotland was wrongly decided, as the EAT in that case should have followed the case of Bamsey v Albion Engineering and Manufacturing 2004. In Bamsey, the Court of Appeal held that only overtime which is both guaranteed and compulsory should be include in the holiday pay calculation and, crucially, did not make any changes to the wording of the Working Time Regulations to reach this conclusion.

The Court of Appeal has rejected these arguments, holding that is correct to alter the wording of the WTR to give effect to European law on holiday pay. The Court of Appeal held that ‘assessed though a domestic legislative lens’ the Claimant’s entitlement to holiday pay was confined to basic salary. However, the Working Time Regulations were enacted ‘solely and deliberately’ for the purpose of implementing obligations arising under the European Working Time Directive and should be interpreted accordingly to include commission in holiday pay.

The Court stated that the case of Bamsey need not be followed as it pre-dated key case law developments in the field of holiday pay.

What does this mean for me?

This decision confirms what we have thought since the ECJ ruling. It means that any employee with a commission element to their pay must have this reflected in the remuneration they receive whilst they are on annual leave.

The fact that we now have a definitive Court of Appeal Judgment on the commission element of pay may make grievances and claims more likely.

The fact that this decision endorses Bear Scotland also strengthens the case for including ‘non-guaranteed’ overtime in holiday pay.

However the Judgment does not provide us with any more help with the practicalities of working out holiday pay. This Judgment provides limited guidance on what exactly should be paid to whom, whether you can distinguish between ‘European’ leave and additional UK/contractual leave, and what the reference period should be for calculating pay. The Judgment acknowledges that the appropriate reference period may be different in different cases.

The ‘mechanics’ of the calculation of commission in holiday pay will need to be determined at a further Employment Tribunal hearing, and those findings may also potentially be appealed.

Comment

We know that approaches to commission and other incentive payments vary hugely. What impact annual leave has on your employees’ ability to earn will vary from role to role and will depend on what the employee is selling and how you have incentivised them to do so.

Before making any decisions about a change in approach please do take advice on what it might mean for your organisation, your employees and your system of reward.

A very large number of claims were ‘stayed’ pending the outcome of this decision. Any live cases against your organisation may now be moved forward by the Employment Tribunals. However, it is reported that British Gas have sought permission to appeal to the Supreme Court, so any such action may be delayed until it is clear whether a further appeal will go ahead.

Post-Brexit, it is possible that the Government may seek to revisit this issue and simplify the calculation of holiday pay. It is also possible that the UK Courts and Tribunals might get there first. If there is no obligation to interpret the WTR in line with European law post-Brexit, it is possible that the decisions in Lock and Bear Scotland which seek to do so may be vulnerable to legal challenge.

Today’s Court of Appeal Judgment clarifies the state of the law right now. However, the holiday pay issue may have some distance to travel before we reach a settled and workable position for employers.

View the full judgment

Phil Allen (phil.allen@weightmans.com) is a Partner in the Employment, Pensions and Immigration Team at Weightmans LLP. If you have any questions about the impact of this Judgment on your organisation please do not hesitate to contact Phil or speak to your usual Weightmans advisor.

Look out for further detailed analysis of this decision and it’s implications in October’s edition of our employment law newsletter HR

 

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