In March 2015, we reported on the outcome of the employment tribunal’s decision in Lock v British Gas Trading Ltd, one of the cases at the forefront of the litigation on how holiday pay should be correctly calculated. A reference to the ECJ had determined that results-based commission should be included in the calculation of holiday pay.
However, this was not the end of the matter. A number of live issues remained, including whether the UK’s Working Time Regulations 1998 (WTR) could actually give effect to this ruling. If not, the UK’s courts and tribunals would have to abide by UK law – which do not expressly provide for results-based commission to be taken into account – despite its incompatibility with the ECJ’s judgment. This would arguably be in employers’ favour. However, the employment tribunal went on to find that the relevant regulations in the WTR could be modified to enable commission to be taken into account. This point was appealed to the EAT and judgment has today been published. Unfortunately, a number of issues still lack clarity.
The EAT has dismissed British Gas’ appeal, finding that as an earlier EAT in Bear Scotland v Fulton had recently decided that the domestic legislation can be interpreted in a way which conforms to the requirements of EU law, it was going to follow that decision. Although the EAT confirmed that it was not bound by the earlier decision, it said that in ordinary circumstances it could only depart from it in prescribed circumstances, none of which applied here. In particular, the decision in Bear Scotland was not manifestly wrong; neither were there exceptional circumstances justifying a departure from that decision in this case.
So where does this leave employers now? The employment tribunal found that the WTR should be interpreted to read with the following modification (shown in italics), which presumably now applies:
16(2) Sections 221 to 224 of [the Employment Rights Act 1996] shall apply for the purposes of determining the amount of a week’s pay…subject to the modifications set out in paragraph (3).
16(3) The provisions referred to in paragraph (2) shall apply-
(e) as if, in the case of the entitlement under Regulation 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purpose of section 221.
Section 221 ERA provides that where remuneration varies with the amount of work done, the amount of a week’s pay is the amount of remuneration for the number of normal working hours in a week calculated at the average hourly rate of remuneration payable in respect of the period of the previous 12 weeks. Presumably the average hourly rate for these purposes includes both basic salary and commission. The effect of the wording read into the WTR, therefore, is to implement a 12 week reference period.
Unhelpfully, however, it is not clear whether the wording proposed by the tribunal is completely settled; in particular, the tribunal had said that the issue of the reference period was to be determined at a later date. It is also not clear precisely how such a reference period would work, as commission paid in the 12 weeks before the calculation date will not be paid entirely in respect of hours worked during those 12 weeks; it may be necessary to average the pay over a different period.
Actions for employers
This EAT judgment is just the latest instalment of the long-running debate over the correct calculation of holiday pay. Whilst it appears today that the issue 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 commission payable; plus other elements of pay such as voluntary overtime and certain allowances have still not been explicitly considered by the courts. In addition, the restrictions on the limitation periods for bringing claims, established in Bear, may still be open to challenge. Employers may not therefore be able to rest just yet, and 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.