The Court of Appeal has confirmed in its decision today in Lock v British Gas that holiday pay must include a representative element of results-based commission. The Court did not comment, however, on whether the 12 week reference period adopted by the tribunal for calculating the commission element was correct in all cases, and indicated that there may be questions as to what is the appropriate reference period in any particular case.

The brief facts are that Mr Lock was employed by British Gas as a salesman, earning a basic salary of under £15,000 but with substantial potential for commission (generally up to 60% of his overall remuneration). During periods when he took annual leave, he was paid basic salary plus any commission earned in previous weeks which fell due for payment. On return from holiday, however, his remuneration would be lower as he had not had the opportunity to earn commission whilst absent on leave. He brought a claim for unlawful deductions from wages.

On a reference from the employment tribunal, the ECJ held that a worker is entitled to normal remuneration when taking annual leave and therefore should have commission included in holiday pay. The tribunal then held that the Working Time Regulations (WTR) could be read in order to give effect to the ECJ’s ruling. The EAT dismissed British Gas’ appeal. British Gas appealed to the Court of Appeal.

The Court of Appeal held that the court can and should interpret the Working Time Regulations as providing that Mr Lock is entitled to have his holiday pay calculated by reference to his normal remuneration, by requiring his commission earnings to be taken into account when calculating 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. The effect of the tribunal’s decision in Lock was to imply a 12 week reference period prior to the period of annual leave, over which earnings should be averaged in order to calculate holiday pay, which the Court of Appeal approved in this case. However, the Court of Appeal did not comment on whether this was the correct reference period in all cases, and 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. This could make the calculation and payment of holiday pay a huge administrative burden for employers, in addition to the increased wage bill which they will face.

The Court did state that the words read into the WTR by the tribunal were too wide insofar as they referred to all commission and not just results-based commission such as Mr Lock was entitled to.

This may not be the end of the matter: Sir Colin Rimer, giving the lead judgment in the Court of Appeal, said that his view on the answer to the central issue of interpretation had wavered, and British Gas has not yet indicated whether it intends to appeal to the Supreme Court.

Following the vote on 23 June to leave the EU, in the longer term it will be for the UK Government to decide what pay employees are entitled to when taking annual leave. We now understand that the UK is likely to leave the EU around March 2019. However, following Theresa May’s speech to the Conservative party conference in which she said that “Existing workers’ legal rights will continue to be guaranteed in law …. We’re going to see workers’ rights not eroded, and not just protected, but enhanced under this government.” it seems that reform of employment law may not be an immediate priority.

Actions for employers

This judgment is the latest instalment of the long-running debate over the correct calculation of holiday pay, but it is not the last word on the issue. Whilst it appears that the question of whether the WTR can be read so as to comply with EU law is settled (for now at least), a number of important issues still remain unresolved, not least how appropriate reference periods should be constructed to calculate correctly the commission payable in respect of annual leave. Whether other elements of pay such as voluntary overtime, bonus and certain allowances should be included in normal remuneration still has not been definitively ruled on by the courts. Employers should continue to keep their pay structures under review, taking legal advice in order to assess their holiday pay risks and how to minimise them.