The recent decision of the Employment Appeal Tribunal (EAT) in British Gas Trading Ltd v Lock and others (UKEAT/0189/15) represents the latest instalment in the long running saga of court decisions on the vexed question of what should and should not be included in the calculation of holiday pay for the purposes of the four weeks’ holiday entitlement under the EU Working Time Directive (the Directive). Historically, many UK employers paid only basic salary but this is not supported by recent case law in various circumstances.
Mr Lock had been employed with 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 Working Time Regulations 1998 (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.
Employment tribunal decision
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.
The effect was that commission was required to be taken into account when calculating Mr Lock's entitlement to holiday pay for holiday that accrued under the Directive. However, recent reports suggest that the employer is seeking leave to appeal against the EAT’s decision so this may not be the end of the story.
The decision of the EAT in the Lock case only takes us so far. On the one hand it appears to confirm the current direction of travel of the UK courts and their willingness to read additional wording into the Regulations to achieve compliance with the Directive where there is a perceived inconsistency between the two pieces of legislation. However, it appears that this decision may be appealed, and in any event there will doubtless be further court judgments in the holiday pay saga before the law reaches a fully settled position on the issue of how holiday pay is calculated.
Furthermore, while the EAT’s decision in Lock confirmed the inclusion of commission in holiday pay for the four weeks’ holiday entitlement under the Directive, it did not specifically address what other payments beyond basic salary should be included in calculating such holiday pay. As such, there is much that remains to be clarified as the law develops in this area.
Finally, in the context of the current debate about the possibility of a “Brexit” from the EU, it should be noted that if the UK left the EU then decisions such as Lock, with UK courts adding words to UK legislation to bring them into line with EU law, would be likely to be a thing of the past. In such circumstances it would be likely that the law in relation to holiday pay and holiday rights more generally would be revisited by Parliament, given that many UK employment rights in this area are derived from EU law. However, for the time being at least UK courts will continue to grapple with the issue of how to interpret the Regulations in light of the Directive.