British Gas Trading Limited and (i) Mr Z J Lock (ii) Secretary of State for Business, Innovation and Skills

Why care?

Under Article 7 of the EU Working Time Directive, all workers have the right to paid annual leave of at least four weeks (5.6 weeks in the UK under the Working Time Regulations 1998 “WTR”). However, it is left to national legislation to define how pay should be calculated. In the UK, the WTR say that employees are entitled to one week’s pay for each week of holiday using the calculations in sections 221-224 of the Employment Rights Act 1996.

The ERA states that workers with “normal working hours” will have their week’s pay calculated by reference to those hours; however, those with normal working hours whose pay varies and those without normal working hours will have their week’s pay calculated using his or her average remuneration over the previous 12 working weeks.

This is the latest instalment in a long-running case to determine what should be included in holiday pay for the four weeks’ statutory paid holiday to which workers are entitled under Regulation 13 of the WTR. (Workers are entitled to an additional 1.6 weeks’ paid holiday under Regulation 13A: this decision does not apply to that leave.)

The facts

It’s almost impossible to summarise this case without a brief history so far. Mr Lock is employed by British Gas Trading Limited as an Internal Energy Sales Consultant. Although he earns a basic salary, approximately 60% of his remuneration is commission he has earned from sales, paid weeks or months after the sale has happened. When consultants are on holiday, it is British Gas’s usual practice to pay them holiday pay based upon their basic salary, and any commission they are owed from previous sales.

The Claimant brought a claim in the Employment Tribunal for unpaid holiday pay, arguing that he did not make any sales (and therefore earn commission) whilst he was on holiday, and so had a reduced income in the following months.

When the case first came to the Leicester employment tribunal, the tribunal was faced with two competing decisions: Evans v Malley Organisation Ltd t/a First Business Support, where the Court of Appeal held a salesman was entitled only to holiday pay based on his basic salary and not on his commission earnings; and Williams v British Airways, where the ECJ (later followed by the UK’s Supreme Court) had held that a worker should receive his “normal remuneration” on holiday, and that pilots should receive an amount of holiday pay to include not only their basic salary but also flying allowances (which were intrinsically linked to their role), but not payments to cover expenses for time spent away from their base (which were only occasional or ancillary costs).

The employment tribunal stayed the claim and referred it to the ECJ, which held that where a worker is paid commission calculated on the basis of the sales that they make or other targets that they meet, the commission must also be included in the calculation of the holiday pay and the WTD precludes national law calculating statutory holiday based on basic salary alone.

The case was remitted to the Leicester tribunal to determine if the WTR could be interpreted in line with the ECJ decision and the EAT’s decision in Bear Scotland (a holiday pay case in which it was held that non-guaranteed overtime and certain other allowances should be included when calculating statutory holiday pay under Regulation 13 of the WTR), and – if it could not – whether words could or should be added in to interpret the WTR to conform with the calculation of a week’s pay under EU law (the Marleasing principle, as applied in Bear Scotland). The tribunal adopted the same approach as in Bear Scotland and held that the WTR can and should be read so that 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.

British Gas appealed the tribunal decision, but the appeal was dismissed by the EAT.

The EAT held it was not possible to distinguish Bear Scotland and Lock. The concept of “normal working hours” applies to both non-guaranteed overtime and to commission, and inBear Scotland itself the EAT had considered the case to be of a piece with BA v Williams, another case that did not concern overtime.

As a general principle, the EAT will follow its earlier decisions unless an exception to that rule applies. Here there was no question that Bear Scotland was “manifestly wrong”, one of the possible exceptions. Whether the circumstances of the case are sufficiently exceptional to justify a departure from a previous decision depends on all the facts, but here there had been very full argument in Bear Scotland on the key question of whether domestic legislation can be interpreted in a way which conforms to EU law, and Langstaff J had correctly understood and set out the relevant principles. Simply because he reached a different decision on the compatibility of domestic legislation to EU law to that in another case did not mean he had misunderstood the principles in Bear Scotland.

The EAT rejected a request that it reconsidered the arguments in Bear Scotland, since if it were to do so, a third EAT case might take a different view in a future case, creating uncertainty. It is for the Court of Appeal, said the EAT, to determine whether Bear Scotland is correct.

What to take away

Unsurprisingly, given the comment above that it is for the Court of Appeal to decide whetherBear Scotland was correctly decided – and the history of this case so far – British Gas have been granted leave to appeal. Mr Lock’s case is one of 60 against British Gas in the East Midlands region, and 918 in the UK, to say nothing of “many thousands” (in the EAT’s words) of similar claims against other respondents, all of which are stayed at present.

Employers know that commission, non-guaranteed overtime and certain allowances must be included in the calculation of holiday pay. What the decision does not answer are the practical questions employers need to answer in order to calculate holiday pay. What is the appropriate reference period? Williams and earlier decisions in Lock say that the reference period must be a representative normal period (12 months, suggested the Advocate General in his Opinion before the ECJ decision in Lock). The ECJ said that it was for the national court to take an average figure over a period “considered to be representative”.

What happens where – as British Gas argued – the commission rate has been set at a level which provides compensation for sales not made whilst on holiday (an element of unlawful rolled-up holiday pay)?

In the meantime, Bear Scotland is not over either: when that was remitted to the employment tribunal, the tribunal applied the EAT’s decision that a three-month gap between deductions (underpaid holiday) was sufficient to break the chain of deductions and limit claims for back pay. Those claimants are appealing that decision to the EAT.

Finally, Mr Lock himself will be waiting for the case to return to the Leicester employment tribunal to determine the reference period and to calculate the holiday pay owing to him.