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Holiday pay: EAT says Working Time Regulations 1998 can be interpreted to include commission in holiday pay

Submitted By Firm: Addleshaw Goddard

Contact(s): Michael Leftley, Sarah Harrop

Author(s):

Amanda Steadman

Date Published: 5/5/2016

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In the case of Lock v British Gas Trading Ltd the Employment Appeal Tribunal (EAT) has dismissed British Gas' appeal and ruled that the Working Time Regulations 1998 can be interpreted to provide that holiday pay must include relevant commission payments. There were no circumstances to justify a departure from the approach taken by the EAT in the Bear Scotland litigation.

Background and facts

The European Working Time Directive (WTD) provides that workers have the right to paid annual leave. Whilst the WTD does not specify how such payments are to be calculated, our domestic Working Time Regulations 1998 (WTR) provide that workers will be paid at the rate of a "week's pay" for each week of leave (which is calculated in accordance with ss. 221-224 of the Employment Rights Act 1996 (ERA)).

In this case, Mr. Lock was employed as a Sales Consultant and was remunerated by way of a basic salary payment, plus a sales-based commission payment which accounted for approximately 60% of his total pay. The commission payment was variable and was paid several weeks or months after the sale to which it related was achieved. When Mr. Lock was on holiday, he was unable to make any sales. This, in turn, meant that he was unable to accrue any sales-based commission payments to be paid in the subsequent weeks or months. Consequently, his income was reduced in the weeks or months following a period of holiday.

Mr. Lock brought an Employment Tribunal claim for unpaid holiday pay in respect of the lost holiday commission payments. Given conflicting domestic and ECJ case authorities on this area, the Tribunal elected to refer a number of questions to the ECJ. In essence, the ECJ was asked whether annual leave should include commission payments that Mr. Lock would have accrued had he not been on annual leave.

ECJ decision – May 2014

The ECJ ruled that the WTD requires that during annual leave workers must receive their normal remuneration. It ruled that where pay is made up of different components and a component is "intrinsically linked" to the worker's contractual duties, then holiday pay should be calculated to include such payments. You can read our detailed report on the ECJ decision here.

Employment Tribunal decision – March 2015

The case then returned to the Employment Tribunal to decide whether the WTR could be interpreted in line with the ECJ’s decision. If it could not, then employees of private sector employers would not be able to enforce their rights to have such payments included in their holiday pay and the Government would be required to amend the WTR.

The Tribunal decided that the WTR could be interpreted to comply with the WTD, noting that the EAT had taken a similar step in Bear Scotland Ltd v Fulton and Baxter, Hertel (UK) Ltd v Wood and others, Amec Group Limited v Law and others (Bear Scotland), which concerned the inclusion of overtime within holiday pay (you can read our report on the Bear Scotland decision here).

The Tribunal decided that additional words should be inserted into the WTR to provide that any worker who has normal working hours, and whose remuneration includes "commission or a similar payment", should be treated in the same way as employees who have normal working hours and whose remuneration varies with the amount of work done. This meant that their holiday pay should be calculated by reference to weekly average pay over a 12-week reference period. This averaging process would capture all of the payments made to the worker within the reference period.

EAT decision – February 2016

British Gas appealed the Tribunal's decision on two grounds:

  • The Tribunal had been wrong to conclude that the EAT's decision in Bear Scotland had any bearing on the Lock case. Commission and non-guaranteed overtime are dealt with under different provisions and should be treated differently.
  • In any event, even if it was appropriate to approach overtime and commission in the same way, the EAT in Bear Scotland had been wrong to decide that the WTR could be read purposively.

The appeal was heard on 8 and 9 December 2015 and the judgment was handed down on 22 February 2016. The EAT dismissed the appeal:

  • On the first ground of appeal, it was held that Bear Scotland was not distinguishable from Lock, and there was no basis upon which commission and overtime should be treated differently.
  • On the second ground of appeal, it was held that the EAT in Bear Scotland had already decided that the WTR could be interpreted to conform with the WTD, and this was of persuasive authority. The general principle is that the EAT is not bound by its own decisions, but they are of persuasive authority and should be followed save in cases where an established exception applies. In this case, the exception relied on by British Gas was that the decision of in Bear Scotland was "manifestly wrong". However, the EAT disagreed, and also said there were no other exceptional circumstances to justify taking a different approach in Lock to the one taken in Bear Scotland. The EAT ended its decision noting that: "…if Bear Scotland was wrongly decided then it must be for the Court of Appeal to say so…".

Comment

The ECJ's decision that holiday pay should include appropriate commission payments was not under scrutiny in this appeal. That issue has been definitively decided and is binding in the United Kingdom. This appeal concerned whether our domestic legislation could be interpreted in a way to conform with European law. The EAT has said that it can – agreeing with the approach taken by the EAT in Bear Scotland in connection with overtime payments.

British Gas has appealed the decision to the Court of Appeal.  The hearing will take place in July 2016.

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