The Court of Appeal has finally passed judgment on the vexed issue of holiday pay.
In the long-running case of Lock v British Gas, the CoA has confirmed that an employee’s holiday pay must be based on their basic pay and any results-based commission they would have earned if they were not on annual leave.
Mr Lock was a sales representative employed by British Gas, whose role involved persuading customers to purchase British Gas’s products. His remuneration package included a basic salary and monthly variable commission based on his sales. His basic salary was £1,222.50 per month, but his commission significantly exceeded this amount.
When he was on annual leave, he was paid his basic pay. His holiday pay did not take into account any commission that he would have earned had he been at work. Mr Lock argued that by taking holiday, he was losing income and brought a claim to an Employment Tribunal against British Gas.
European Court of Justice
The Employment Tribunal referred the case to the European Court of Justice (ECJ), asking whether commission should be included when calculating statutory holiday pay.
The ECJ ruled that when the commission is inherently linked to the employee’s work duties under their contract of employment, the employer is required to take the commission into consideration when determining holiday pay. It left it to the discretion of the national courts to work out how the commission-based element of holiday pay should be calculated.
Employment Tribunal and Employment Appeal Tribunal
The case was then referred back to the Employment Tribunal. The contentious issue was whether the Working Time Regulations – the legislation that was enacted in the UK to give effect to EU law – could be read and interpreted as including commission in holiday pay. They concluded that it was lawful and necessary to imply words into the Working Time Regulations in order to ensure that it was compatible with EU law.
The Employment Appeal Tribunal upheld the decision.
Court of Appeal
The Court of Appeal followed the previous approaches taken by both the Employment Tribunal and Employment Appeal Tribunal. It held that it is permissible to imply words to interpret the Working Time Regulations as allowing employees, like Mr Lock, to have their holiday pay calculated by reference to their normal remuneration. They maintained that this was not a “judicial exercise amounting to the repeal or amendment of the legislation”.
What is most significant in the Court of Appeal’s judgment is that the Court affirmed that the wording used by the Employment Tribunal is too wide. It encompasses all types of commission, not just results-based commission. The Court expressly limited the effect of this judgment to results-based commission.
Impact on Employers
This is a significant case with far-reaching repercussions for employers. The Court revealed that at present, there are over 900 similar claims against British Gas and thousands of claims on this issue against other employers which were put on hold pending the outcome of this appeal. The case is not over yet – it has been reported that British Gas will appeal to the Supreme Court.
The main issue of the judgment by the Court of Appeal is that it leaves us with a number of unanswered questions. How do we calculate holiday pay? Should annual bonuses be considered when working out holiday pay? What should be used as the reference period for the calculation of holiday pay? The list of questions goes on and on. The Court, unfortunately, decided that they would not answer them in this judgment.
Brexit also adds a bit more confusion. As we reported previously, the government has announced plans to end the supremacy and jurisdiction of ECJ in the UK and to introduce a Great Repeal Bill. This will allow Ministers to maintain, amend or revoke EU law. One of those areas subject to scrutiny may be holiday pay.
If you would like to discuss any of the issues raised in this case or the impact of this decision on your organisation, please contact your Employment Law Adviser.