The Court of Appeal has recently held in British Gas Trading Ltd v Lock and anor that the Working Time Regulations 1998 (the WTR) should be interpreted in line with the Working Time Directive (WTD) to include results-based commission in statutory holiday pay.
What does the law say about holiday pay?
Article 7 of the WTD provides that member states must ensure that workers have the right to at least four weeks' paid leave.
Although it does not specify how statutory holiday pay should be calculated, the European Court of Justice (ECJ) has held that "paid annual leave" means that workers on holiday should receive their "normal remuneration".
The WTD is implemented into UK law by the WTR. The WTR makes no mention of "normal remuneration" and instead, provides for holiday pay to be calculated with reference to sections 221 to 224 of the Employment Rights Act 1996 which is used to calculate a week's pay for redundancy compensation purposes.
Background to Lock
Mr Lock, a sales consultant for British Gas, was paid commission on a monthly basis. On average, commission made up about 60% of his pay. When he took annual leave, however, he was paid only his basic pay. Mr Lock brought an employment claim for outstanding holiday pay.
The tribunal referred Mr Lock's case to the ECJ asking if the WTD requires commission to be included in holiday pay. The ECJ replied in the affirmative so the matter was remitted back to the employment tribunal which considered that the WTR should be interpreted to conform with the WTD. This followed the EAT's decision in Bear Scotland v Fulton and others, where it was held that the WTR can, and should, be interpreted to conform with the WTD to enable holiday pay to include non-guaranteed overtime.
British Gas appealed, arguing that Bear Scotland was wrongly decided and should not be followed. Although the EAT acknowledged that it is not bound by its own decisions, such decisions are of persuasive authority. It concluded that there was nothing to prevent the EAT in this case from following the decision in Bear Scotland.
Commission payments to be included in holiday pay
The Court of Appeal has now unanimously upheld the decision of the EAT and confirmed the correct approach is to look at "normal remuneration". Despite having lost now at every level, British Gas has indicated that leave will be sought to take this issue to the Supreme Court so we may not have heard the last word on this important issue.
What we can say is that employers who have not been including commission payments in holiday pay calculations will now run the very real risk of having a succession of unlawful deductions from wages claims brought against them. One consolation for employers will be that, under the Deduction from Wages (Limitation) Regulations 2014, there is now a two year backstop on claims for holiday pay which are made on or after 1 July 2015.
Should voluntary overtime be included?
Voluntary overtime is still a grey area. Employers need to be aware that tribunals will deem that it forms part of a worker's normal remuneration if a settled pattern has developed enabling it be to labelled "normal" pay.
Brettle and ors v Dudley Metropolitan Borough Council, a recent employment tribunal case, dealt with purely voluntary overtime. A group of 56 housing repair workers argued that they should have received holiday pay which included additional sums in respect of voluntary overtime, call-out payments and mileage and standby allowances.
The tribunal found in the workers' favour. They were paid with sufficient regularity for the payments to be considered part of their normal remuneration. This is only a tribunal decision so it is non-binding though it does follow the reasoning in Bear Scotland that payments received as part of "normal remuneration" should be included in any holiday pay calculation. We suspect other similar decisions will follow.
How should such payments be calculated?
Ambiguity remains as to the practicalities of how such payments should be calculated. The Advocate General in Lock suggested that when calculating a worker's "normal remuneration" during their holiday, the previous 12 months should be taken as the appropriate reference period. Suggestions of a predetermined fixed period were ignored by the ECJ which ruled that holiday pay must correspond to the worker's "normal remuneration" and that this was a matter for the national courts to work out by taking an average over a reference period that it "considered to be representative". The practicalities of how such payments should be calculated remains to be determined.
Conclusion
Whilst for the moment employers will have to include commission payments in holiday pay calculations, it may be that things will change post-Brexit. Although Theresa May has confirmed that existing workers' rights will be guaranteed, it is likely that this will be an area where we will see employers lobbying for a change in law to revert to the original UK legislative approach.