UK: Court of Appeal judgment in Lock confirms holiday pay must include results-based commission

This afternoon, the Court of Appeal released its judgment in the holiday pay case, British Gas Trading v Lock, dismissing the employer's appeal.  It confirmed that words can be read into the Working Time Regulations (to comply with EU law) to provide that results-based commission is reflected in the calculation of pay for the 4 weeks' statutory holiday pay entitlement. 

It has been reported that the employer has applied for permission to appeal to the Supreme Court.

Mr Lock was a salesman paid a low basic salary and a generous variable commission paid in arrears. Because his commission was based on sales achieved rather than time worked, the rules for calculating holiday pay (contained in the Employment Rights Act (ERA)) meant that his holiday pay only reflected his basic salary.  This was contrary to the European Court of Justice 2011 ruling in British Airways v Williams that the Working Time Directive requires holiday pay to reflect normal remuneration.

UK courts are required to construe domestic legislation intended to give effect to an EU Directive to conform with that Directive so far as possible without going against the grain or underlying thrust of the domestic rules.  The tribunal concluded that it was possible to construe the domestic rules appropriately, by adding words to deem workers with normal working hours who receive commission ‘or similar payments’ to be workers whose remuneration varies with the amount of work done.  This would mean that the ERA provisions averaging pay (including contractual commission) over the previous 12 weeks would apply to this type of worker when calculating the 4 week holiday pay entitlement.  The EAT agreed and the employer appealed to the Court of Appeal.

In the Court of Appeal, Sir Colin Rimer noted that he had not found the question easy and his view had wavered as to whether the tribunal's conforming interpretation went against the thrust of the domestic regulations. The employer argued that the relevant grain was "the adoption lock, stock and barrel of a pre-existing set of rules" in the ERA and that it would be going against this to disapply that set of rules in particular situations. 

In the event, the judge rejected this, concluding that the domestic rules were enacted solely and deliberately for the purpose of implementing the Directive.  The adoption of the ERA rules was a convenient way of providing that holiday be paid, at a time when the application of those rules to individuals earning commission had not been considered by the courts and the European Court of Justice had not yet made clear that holiday pay had to reflect 'normal remuneration'.  In most cases the ERA rules do adequately reflect normal remuneration, with two anomalies (commission and non-guaranteed overtime). Sir Rimer was not prepared to conclude that those two anomalous cases reflected a positive legislative choice deliberately aimed at disadvantaging those types of worker, at odds with the requirements of the Directive.  Rather, he considered it more likely that parliament had simply not foreseen the particular problem that was to arise once the requirement for 'normal remuneration' became clear. 

The tribunal was therefore correct to interpret the rules as it did, subject to confining the wording to contractual results-based commission (rather than all types of commission) to limit it to the facts in issue.

The judgment notes the difficulties of - but sheds no light on - determining an appropriate reference period.  Sir Rimer raises the questions of whether and how the calculation for paid holiday should reflect a single, annual, large results-based bonus, and of employees who only receive commission once a threshold is reached, but he simply states that "nothing in this judgment is intended to answer" such questions. 

The issue of holiday pay is one of the areas that has been suggested as ripe for amendment once the UK leaves the EU, given that this could enable the government to legislate to reverse the decisions of the European Court.  However, this may have been ruled out for the time being, given Theresa May's statement at the Conservative Party Conference that during her premiership "existing workers' legal rights will be guaranteed".