In February this year, we reported to you via our Hub, that in Lock v. British Gas the EAT had held that holiday pay must include commission payments. The EAT applied the European Court of Justice's (ECJ) ruling on this issue and interpreted domestic UK law in a way that conforms with EU law.
The position under EU law is that workers must have the right to at least four weeks' paid annual leave. However, it does not specify how holiday pay should be calculated. In the UK, the Working Time Regulations 1998 (WTR) implement the European Working Time Directive (the Directive) and provide that holiday pay, for a worker who works "normal working hours", is calculated on basic salary only.
Despite the wording of the WTR, the EAT has held that the WTR can and should be interpreted to conform with the Directive, and that holiday pay must reflect a worker's "normal remuneration", which includes non-guaranteed overtime (Bear Scotland). Also, on referral, the ECJ ruled that holiday pay under the Directive includes commission, to ensure workers are not discouraged from taking annual leave (Lock v. British Gas).
British Gas appealed the ET's decision. It argued that adding or implying words into UK legislation to conform with EU law amounted to "judicial vandalism". Further, it argued the Bear Scotland case, which was to do with non-guaranteed overtime, should not have been applied to a dispute about commission. The EAT dismissed British Gas's appeal, disagreeing with both of its arguments.
British Gas lodged a further appeal to the Court of Appeal. It was hoped that some further guidance would be given around how to factor commission or non-guaranteed overtime into the calculation of holiday pay. The Employment Rights Act 1996 uses a reference period of the last 12 weeks to calculate pay where pay varies according to the amount of work done or the time of work. The Advocate General suggested a reference period of 12 months. The ECJ held that national courts must decide a reference period that they "consider to be representative". The ET suggested the reference period for calculating holiday pay should be the period of 12 weeks immediately before the holiday (excluding any weeks where no remuneration was paid for any reason).
The Court of Appeal decision has now been handed down. While this is an important decision, it does not in fact say anything new. The Court of Appeal took a malleable interpretation to the WTR to find that, when calculating holiday pay, workers are entitled to be paid an amount which reflects the commission they would have earned if not on holiday. We knew this already!
As for the issue of how to calculate holiday pay, the court stated that “nothing in this judgment is intended to answer [that]"!
Given that British Gas has suggested that it has around 1,000 potential claims that have been awaiting this decision, there is a strong likelihood that British Gas will appeal this decision to the Supreme Court. However, now the Court of Appeal has ruled on this issue, employers should, where relevant, ensure that commission is included in holiday pay. This could have huge financial implications for employers with high numbers of staff working on commission. As to what reference period to use for calculating the commission to be paid, employers should, with reference to general practice in the industry within which they operate, look at their commission scheme and make a sensible decision. Commentators have suggested that 12 weeks could be an appropriate reference period, which we agree is a helpful starting point for employers.
Despite Brexit, employers will still have to comply with this decision as, until the UK leaves the EU, UK legislation has to be interpreted in line with both EU directives and decisions of the ECJ.
It is worth noting, however, that the application of this decision is limited. It applies to workers (1) with normal working hours; (2) whose pay does not vary with the amount of work completed; and (3) whose results-based commission is part of their normal remuneration.