The Court of Appeal has dismissed British Gas's appeal and ruled that the Working Time Regulations 1998 can be interpreted to provide that holiday pay must include relevant commission payments.
Background and facts
The European Working Time Directive (WTD) provides that workers have the right to paid annual leave. Whilst the WTD does not specify how such payments are to be calculated, our domestic Working Time Regulations 1998 (WTR) provide that workers will be paid at the rate of a "week's pay" for each week of leave (which is calculated in accordance with ss. 221-224 of the Employment Rights Act 1996 (ERA)).
In this case, Mr Lock was employed as a Sales Consultant and was remunerated by way of a basic salary payment, plus a sales-based commission payment which accounted for approximately 60% of his total pay. The commission payment was variable and was paid several weeks or months after the sale to which it related was achieved. When Mr. Lock was on holiday, he was unable to make any sales. This, in turn, meant that he was unable to accrue any sales-based commission payments to be paid in the subsequent weeks or months. Consequently, his income was reduced in the weeks or months following a period of holiday.
Mr. Lock brought an Employment Tribunal claim for unpaid holiday pay in respect of the lost holiday commission payments. Given conflicting domestic and ECJ case authorities on this area, the Tribunal elected to refer a number of questions to the ECJ. In essence, the ECJ was asked whether annual leave should include commission payments that Mr. Lock would have accrued had he not been on annual leave.
ECJ decision – May 2014
The ECJ ruled that the WTD requires that during annual leave workers must receive their normal remuneration. It ruled that where pay is made up of different components and a component is "intrinsically linked" to the worker's contractual duties, then holiday pay should be calculated to include such payments.
Employment Tribunal decision – March 2015
The case then returned to the Employment Tribunal to decide whether the WTR could be interpreted in line with the ECJ’s decision. If it could not, then employees of private sector employers would not be able to enforce their rights to have such payments included in their holiday pay and the Government would be required to amend the WTR.
The Tribunal decided that the WTR could be interpreted to comply with the WTD, noting that the EAT had taken a similar step in Bear Scotland Ltd v Fulton and Baxter, Hertel (UK) Ltd v Wood and others, Amec Group Limited v Law and others (Bear Scotland), which concerned the inclusion of overtime within holiday pay.
The Tribunal decided that additional words should be inserted into the WTR to provide that any worker who has normal working hours, and whose remuneration includes "commission or a similar payment", should be treated in the same way as employees who have normal working hours and whose remuneration varies with the amount of work done. This meant that their holiday pay should be calculated by reference to weekly average pay over a 12-week reference period. This averaging process would capture all of the payments made to the worker within the reference period.
EAT decision – February 2016
British Gas's appeal to the EAT was dismissed. The EAT decided that Bear Scotland was not distinguishable from Lock, and there was no basis upon which commission and overtime should be treated differently.
They also held that the EAT in Bear Scotland had already decided that the WTR legislation could be interpreted to conform with the WTD, and this was of persuasive authority. That decision could not be said to be "manifestly wrong" nor were there any other exceptional circumstances to justify taking a different approach. The EAT ended its decision noting that: "…if Bear Scotland was wrongly decided then it must be for the Court of Appeal to say so…".
Court of Appeal decision – October 2016
British Gas appealed again 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 decided that when faced with the question of whether a conforming interpretation can be adopted, the Courts should not confine themselves to the literal meaning of the legislation. Instead, they must consider whether a conforming interpretation is in line with the "grain" of the law.
In answering the question of whether the WTR could be interpreted in this way, the Court decided that it could be presumed that the UK Government intended to fulfil entirely the obligations arising under the WTD. This included any obligations which were not apparent at the time the WTD was implemented, such as the requirement for holiday pay to be "normal" pay.
The Court concluded that the WTR properly implemented the WTD in nearly all respects, but failed to address either commission or non-guaranteed overtime payments. The Court decided that this differential treatment was more likely to be an oversight 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.
If British Gas does not appeal further, then we have a Court of Appeal authority confirming that the WTR can be read to conform with the WTD in respect of commission payments. This greater level of certainty may encourage some employers who have not yet adjusted holiday pay calculations to consider doing so now. Any employer wishing to adjust holiday should take legal advice before doing so, given the uncertainties surrounding the precise method of calculating holiday pay (e.g. how to draw the line between regular and irregular payments and which reference period to use).
However, British Gas may be minded to seek permission to appeal to the Supreme Court, particularly given the Court's comments that the question at the heart of this case was not "easy" and was one on which their answer had "wavered".