In British Gas Trading Ltd v Lock and another  EWCA Civ 983, the Court of Appeal has upheld the decision of the Employment Appeal Tribunal (EAT) that the Working Time Regulations 1998 (the Regulations) can be interpreted compatibly with the EU Working Time Directive (the Directive) so as to include results-based commission payments in the calculation of holiday pay for the basic four weeks' annual leave. The Court of Appeal declined the opportunity, however, to explain how employers should include such payments in holiday pay calculations.
Mr Lock had been employed on a remuneration package that included not only basic salary but a success-based commission entitlement. At the end of 2011 and the start of 2012 Mr Lock took some holiday. He was paid his basic salary for the holiday period and also continued to receive commission in respect of sales that he had previously achieved. However, for the period when he was on holiday he was not able to generate any new commission.
Mr Lock argued that he should have been paid commission as part of his holiday pay. His employer resisted this on the basis that this was not provided for in the wording of the Regulations.
The Regulations provide for holiday pay to be calculated by reference to “a week’s pay” (largely as defined by various sections of the Employment Rights Act 1996). Previous UK case law had indicated that the UK statutory definition of “a week’s pay” should not include commission where commission was based on success and not on the amount of work done.
However, the European Court of Justice (ECJ) in Williams and others v British Airways plc had held that the Directive (on which the Regulations are based) requires that a worker receives “normal remuneration” while taking holiday to which he is entitled under the Directive, and that any payments intrinsically linked to tasks that the worker is contractually obliged to perform are normal remuneration. As such, there appeared to be a tension between the wording of the Regulations and the Directive as to whether commission should be included in Mr Lock’s holiday pay.
The employment tribunal (ET) referred this apparent conflict to the ECJ for a ruling on whether commission payments should be included in the calculation of holiday pay in these circumstances. The ECJ found that Mr Lock’s commission must be taken into account in the calculation of holiday pay for holiday to which he was entitled under the Directive. The method of calculating the commission element of holiday pay must be assessed by the national court on the basis of rules and criteria set out by the ECJ in light of the objectives pursued by the Directive.
It then fell to the ET to decide whether the Regulations could be interpreted in such a way as to include commission in the calculation of holiday pay due under the Directive for workers who had normal working hours and whose remuneration did not vary with the amount of work done. The ET found that it could interpret the Regulations in this way by implying extra words into the Regulations to achieve this effect. In doing so it adopted the reasoning of the EAT in Bear Scotland Ltd and others v Fulton and others, which had dealt with a similar question in relation to the issue of including non-guaranteed compulsory overtime in the calculation of holiday pay.
Mr Lock’s employer appealed to the EAT.
The employer appealed against the ET's decision for a number of reasons, including that it was not appropriate for a court to adopt a “conforming interpretation” of UK legislation to bring it into line with the Directive where to do so would “go against the grain” of the UK legislation.
The employer also sought to argue that the Bear Scotland case did not have to be followed in these circumstances as it had addressed a different issue, where the provisions of the Regulations are different.
This was not accepted by the EAT. Instead the EAT found that Bear Scotland should be followed and that the principles being considered in the Lock case were not materially different. Accordingly, in the EAT’s view it was appropriate to read extra words into the Regulations to achieve compliance with the aims of the Directive. Mr Lock's employer appealed to the Court of Appeal.
The Court of Appeal (CA) agreed with the decisions of the ET and the EAT. The CA's view was that the Regulations were introduced with the purpose of implementing the Directive and this purpose included implementing the 'normal remuneration' measure (including by reference to the commission workers earn) for the purpose of calculating holiday pay. The CA acknowledged that the legislature had not foreseen the scenario presented by workers such as Mr Lock (nor those who were workers with non-guaranteed overtime) at the time of implementing the Directive but took the view that this was a case where the Court should perform its duty to provide a 'conforming interpretation' to the legislation for the purposes of implementing the Directive. In line with that 'grain or thrust', the CA held that the courts can, and should, interpret the Regulations as providing that Mr Lock should receive his holiday pay based on his normal remuneration, which was to include his commission earnings.
This decision by the CA does not change anything and merely confirms the position that we have been familiar with for the last couple of years. Recent reports suggest that the employer is seeking leave to appeal to the Supreme Court so it is possible there may yet be further developments over the course of the next year or so. We will watch out for any news on this.
While there is a clear direction of travel of the UK courts and their willingness to read additional wording into the Regulations to achieve compliance with the Directive, several uncertainties still remain in respect of how to calculate holiday pay and what to include on top of basic salary and we suspect it will be some time before there is any settled law in this respect. The anticipated impact of Brexit will no doubt add to the uncertainty in this area.
Frustratingly the CA did not take the opportunity to set out its view on how employers should attempt to calculate holiday pay incorporating employees' commission payments, in particular the length of the reference period that should be used. While some commentators have suggested a 12 week reference period, employers are left in a position in which they have to make up their own minds, taking into consideration their respective commission schemes. This is particularly problematic for those employers who operate a one-off annual bonus scheme or perhaps more regular bonus/commission payments based on a particular level of turnover or profit for example. The CA expressly declined to assist with answering the questions raised by such examples, which was disappointing and is unhelpful for those practitioners and HR professionals attempting to apply the law in practice.
The CA did emphasise that its judgment was very much addressing the circumstances of Mr Lock's case and those who receive a form of results-based commission. The principles should not necessarily be extended to all types of commission and this was fact specific and should be considered on a case by case basis. In this respect, there is at least some acknowledgment and potential relief for employers that where, for example, employees only receive a one-off annual bonus, such payments may not be considered 'normal remuneration' in the same sense.
While many will hope that the law in this area will be re-visited and clarified by the UK Government post-Brexit, until then the UK courts will continue to grapple with the issue of how to interpret the Regulations in light of the Directive and the uncertainty for employers will no doubt remain.