Court Of Appeal Locks In Key Holiday Pay Principles
On Friday, 7 October 2016, the Court of Appeal handed down its decision in British Gas Trading Ltd v Lock. This is a noteworthy case for both employers and employees in those industries where remuneration consists of a basic salary plus variable commission or bonuses.
By way of an update to our previous article on this case, the Court of Appeal has now confirmed that holiday pay must include an amount reflecting commission payments that would have been earned had the worker entitled to them been at work. This is nothing new and serves to confirm the decision of the European Court of Justice (ECJ) in Lock on this matter in 2014, which held that commission payments should be included in holiday pay.
By way of factual reminder, Mr Lock was a salesman who earned a basic salary plus sales-based commission (this being payable in arrears). Mr Lock could not earn commission when taking annual leave. Consequently, when Mr Lock took annual leave he earned a lower week’s pay (in accordance with the Employment Rights Act 1996 (ERA), s.221) for time spent on holiday than for time spent working. To redress this difference in remuneration, Mr Lock presented a claim to the Employment Tribunal.
The Tribunal decision was appealed to the Employment Appeal Tribunal and a referral was made to the ECJ. The ECJ ruled in Mr Lock’s favour with a purposive reading of the Working Time Regulations 1998 (WTR), regulation 16, but left the question of how to make this calculation unanswered.
This purposive reading of the WTR has now been confirmed by the Court of Appeal so it complies with Article 7 of the Working Time Directive. Further, and as with the ECJ previously, the Court of Appeal expressly decided (at paragraphs 114 and 115 of the judgment) not to touch on the question of how the correct amount of commission to give ought to be calculated.
Employers and their representatives will be worried by this decision because it will add to business costs and, through lack of clarification regarding the reference period, it may prove to be time consuming to calculate the correct remuneration as well as leaving the employer open to challenge.
The ERA, ss.221 and 222 sets out that a 12 week reference period prior to the leave for holiday should be used to calculate remuneration. However, the Advocate General in Lock presented the idea of a 12 month reference period so as to incorporate seasonal fluctuations in the calculation. The Court of Appeal declined to comment on this point and it is therefore still unclear how to calculate the correct holiday pay.
Further, as was stated in our previous article, challenges to holiday pay can also be backdated for two years prior to submission of the claim pursuant to the Deduction from Wages (Limitation) Regulations 2014. Clearly, this will leave many employers whose remuneration structures involve variable elements to pay vulnerable to claims at a potentially high cost.
This affirmation of the principles regarding holiday pay deriving from the case of Lock should serve to trigger employers to review their remuneration packages and procedures in relation to holiday pay.
That said, it is possible that an appeal could be presented to the Supreme Court due to the fact that British Gas could face up to 1,000 related claims by their own estimations. If they decide to appeal, a Supreme Court decision will provide ultimate clarification on the issue but it is improbable that this will be before late next year at the earliest.