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Court of Appeal confirms holiday pay should include results-based commission

10 October 2016

The Court of Appeal has given judgment in the ongoing holiday pay case of British Gas Trading Ltd v Lock and another, which raises the question of whether and how a salesman’s commission should be taken into account when calculating his holiday pay.

On the face of our domestic legislation, commission seems to be excluded from calculations of holiday pay, under the Working Time Regulations 1998 (“the Regulations”), which implement the EU Working Time Directive (“the Directive”). But decisions of the European Court of Justice (“ECJ”) have established that the minimum four-week holiday entitlement must be paid at a rate that reflects “normal remuneration”.

In 2014, the ECJ decided that Mr Lock’s commission amounted to normal pay and so should be included in his holiday pay. Back in the UK, the question then arose as to whether the Regulations could be interpreted compatibly with the Directive and the ECJ’s case-law. The Government legal department, which is also a party to the case, has argued (along with Mr Lock) that a compatible interpretation is “both possible and correct”.

The Employment Appeal Tribunal (“EAT”) agreed with this contention and decided that it was possible to interpret the Regulations compatibly with EU law. The practical effect of this for UK workers was that pay from results-based commission would need to be included in the calculation of their holiday pay for the four weeks of statutory holiday required by EU law.

British Gas appealed this decision, arguing that it was not open to the UK courts to interpret the Regulations compatibly with the Directive as the two simply said different things. Nonetheless, the Court of Appeal agreed that it was possible to interpret the Regulations compatibly with EU law.  The Court considered that Parliament had simply not envisaged this scenario, or intended that the Regulations as drafted would result in different types of workers being treated so differently in terms of holiday pay. Even though it was necessary to add extra words to the statute to achieve this result, it did not amount to “judicial vandalism”.

Given the way that the tribunals and courts have dealt with the issue of holiday pay and interpretation of the Regulations to date, it comes as little surprise that the Court of Appeal has taken this approach. How this interpretative duty might evolve once the UK leaves the EU remains to be seen, but in any event that will not occur until at least March 2019.

It is worth noting that the Court of Appeal expressly declined to comment on how other types of payments - such as annual bonus payments, or commission pay based on company targets being met - should be treated for holiday pay purposes. It specifically said that “nothing in this judgment is intended to answer” such questions, which remain unresolved and potentially open to a different approach.

The Court of Appeal also commented that the “amending” words which the Employment Tribunal had said needed to be read into the Regulations were too wide, because they referred to all types of commission and were not sufficiently centred on the circumstances of Mr Lock’s case. In the Court’s view, the wording to be read into the Regulations should be limited to contractual results-based commission.

So, where does this ruling leave us? Apart from the Court of Appeal’s caution in limiting the decision and its consequences to the specific type of commission involved in this case, we’re pretty much in the same place we were at after the EAT’s judgment. 

There is likely to be a further appeal on this point to the Supreme Court. British Gas will no doubt be encouraged by the Court of Appeal’s comments that it did not find this an easy decision and British Gas’s incompatibility argument “merits serious consideration”. But even when these preliminary issues are resolved, it will still remain for the Employment Tribunal to decide on the substance of the matter - whether Mr Lock was underpaid and by how much. That will be the really interesting aspect of this case and only then will employers potentially have the guidance they need to amend their holiday pay practices, if relevant. In the meantime, a “wait and see” approach to commission-based holiday pay remains sensible.

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