No further forward on holiday pay?

Posted by Ruth Christy on
The Employment Appeal Tribunal (EAT) has today ruled that UK law on holiday pay can be interpreted to include notional commission in line with European case law, confirming the position in previous rulings (including its earlier ruling on non-guaranteed overtime).

In the case of British Gas Trading Ltd v Lock, British Gas appealed the decision of an Employment Tribunal which had concluded that it could 'read words' into the UK legislation in order to make it compliant with a European Court of Justice (ECJ) ruling.

Those following the case will remember that Mr Lock was a sales consultant for British Gas whose remuneration was made up of fixed basic salary and variable commission, based on sales achieved (i.e. the number and type of new contracts concluded by British Gas). Commission was paid weeks or months later and represented over 60% of Mr Lock's remuneration (a monthly average of £1,912.67).  

As Mr Lock was on paid annual leave from 19 December 2011 to 3 January 2012, he was not able to make any new sales or follow up on potential sales during that period, and therefore unable to generate commission. He brought proceedings against British Gas for underpaid holiday pay, and in 2014 the ECJ ruled that Mr Lock was entitled to receive notional commission for the period while he was on holiday. Because the commission Mr Lock received was intrinsically linked to the performance of his contractual duties it should have been taken into account when calculating his holiday pay. The ECJ ruled that a worker might be deterred from taking holiday if, afterwards, he or she received reduced pay excluding the commission that would have been earned had he or she been working. In March 2015 the Leicester Employment Tribunal concluded that it could read additional words into the UK's Working Time Regulations 1998 (the Regulations) to comply with the ECJ's decision. (Note that this is limited to the 4 weeks' minimum leave which comes from the Working Time Directive rather than the whole 5.6 weeks under UK law).

British Gas's appeal

British Gas appealed to the EAT, arguing that the Regulations could not be interpreted compatibly with the ECJ's ruling. The Regulations require holiday pay to be calculated by reference to 'a week's pay' and British Gas argued that UK law is clear on what counts as 'a week's pay' in these circumstances. Case law has previously established that for workers with normal working hours like Mr Lock, commission based purely on success or results is not included in 'a week's pay'. However, as the EAT pointed out today, that case law did not consider the requirements of the current Working Time Directive, and so was not binding in these circumstances.

British Gas also argued that the key 2014 EAT case of Bear Scotland & others v Fulton & others about including non-guaranteed overtime in holiday pay which the Leicester ET had relied on:

  • did not apply to commission, and
  • in any event was wrongly decided (again partly because of earlier UK case law).

The EAT also rejected these arguments. It ruled that there was no reason to separate commission from overtime, and that previous UK cases had been decided before the ECJ had clarified how holiday pay was to be determined (i.e. that it should reflect 'normal remuneration'). The EAT therefore refused to reach a different conclusion to its own earlier ruling in the 2014 overtime case, which had rightly taken into account how the Directive should be interpreted.

This result is not entirely surprising. The EAT will not normally reach a different conclusion to an earlier EAT ruling if it concerns the same issue. It may come to a different conclusion if there are conflicting rulings by the same court, if a decision is 'manifestly wrong', or if there are other exceptional circumstances. The EAT commented that there was no reason to come to a different conclusion, because all the issues had been fully argued and considered in the 2014 case. Any change to that would have to be by a higher court (the Court of Appeal). Lawyers for British Gas have said that it is seeking to appeal today's decision.

What are the implications for employers?

After all the waiting, has the EAT ruling made any difference to holiday pay for workers with normal working hours who receive success-based commission? Not really. If British Gas had succeeded, the ECJ's ruling would not have been binding on private employers, and instead commission would not have to be included, despite a conflict with EU case law. As it is, the EAT's decision merely confirms the Leicester ET decision from one year ago, that notional commission must be included in holiday pay. (Note that public sector employers were already bound by the ECJ's ruling on commission in holiday pay.)

If British Gas appeals further to the Court of Appeal, there will be another long wait for the outcome. Employers may argue that claims which were on hold pending today's ruling should remain on hold.

Today's decision also does not address the question which concerns many employers, namely: if notional commission must be included in holiday pay, over what period is it to be calculated? No clear decision was made by the Leicester ET on this issue although arguably it is based on pay over the preceding twelve weeks and this was not part of British Gas's appeal (although there are suggestions that this might be addressed in a separate hearing).

Employers who may have been waiting to see if this decision would affect the ruling on non-guaranteed overtime, will be disappointed (and there have been no further developments on the question of voluntary overtime which remains uncertain).

Again it will be down to individual employers to examine their exposure and determine whether action should be taken now to:

  • change what is included in holiday pay going forward,
  • settle claims about historic underpayments,
  • review commission or overtime structures, or
  • wait and see whether the Court of Appeal would come to a different conclusion (which seems unlikely).

A further interesting development is that according to some reports, a separate appeal is being launched by employees challenging the rule (established in the 2014 overtime case) that the right to claim for historic arrears of holiday pay is lost if there is a gap of three months or more between underpayments. If successful this could result in a significantly larger liability for employers, especially if workers have submitted holiday pay claims before 1 July 2015, when legislation introduced a limit of 2 years on backdated claims for unlawful deductions of wages.

We have a dedicated Employment team at Blake Morgan who would be happy to discuss these issues with you further, and we will of course continue to keep you updated on developments.

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Ruth provides guidance for clients and keeps them up to date with the fast pace of change in employment law.

Ruth Christy
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