British Gas Trading Ltd v (1) Mr Z Lock (2) Secretary of State for Business, Innovation and Skills [2016] EWCA Civ 983

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 to the EAT and then to the Court of Appeal without success. The Court of Appeal agreed that the Working Time Regulations 1998 should be interpreted to include Mr Lock’s results-based commission in his normal remuneration, and therefore in his holiday pay, but made clear that its decision related only to workers such as Mr Lock who have normal working hours, whose pay does not vary according to the amount of work done, but receive individual results-based commission. The decision recognised that questions remain concerning other workers, or other reward based remuneration (such as annual bonuses for bankers) but the Court of Appeal declined to answer these, saying it was dealing only with the facts and issues in Lock.

What to take away

This case is of great importance to UK employers because so many calculate holiday pay on basic salary alone. 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 thousands (as the Court of Appeal noted) of similar claims against other respondents, all of which are stayed at present.

The Court has, as expected, confirmed that workers are entitled to have part of their holiday pay calculated by reference to their normal contractual remuneration measured over a suitable reference period, and that in Mr Lock’s case this means that his average results based commission earnings over a 12 week period are to be taken into account. But the court did not throw much light on how normal remuneration and the requisite reference period are to be calculated in other cases. 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” Tantalisingly, the Court of Appeal here considered the example of a salaried banker who receives a results based annual bonus shortly before going on holiday, but it refused to express a view as to how such a worker’s holiday pay should be calculated.

Employers will still need to consider very carefully, therefore, what exactly constitutes “normal remuneration” for the category of workers in question, how and over which period it is to be measured, and, where the issue is not clear cut, whether it is better in financial and HR terms to be proactive and to seek agreement with its workers, or to wait for the issue to be raised by or on behalf of those workers.

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. The EAT heard an appeal against that decision in April 2016, but no judgment has yet been issued.