CA rules UK regulations require results-based commission to be included in holiday pay: But does it tell us anything new?

Written on 11 Oct 2016

The Court of Appeal (CA) has now handed down its decision in Lock v British Gas, confirming that the UK’s Working Time Regulations 1998 (WTR) can be interpreted to require Mr Lock’s “results-based” commission to be taken into account when calculating holiday pay for the 20 days emanating from the Working Time Directive (WTD).

The Court of Justice of the European Union (ECJ) had already established that these 20 days must be paid at a worker’s ‘normal remuneration’ and that Mr Lock’s results-based commission, which represented about 60% of his earnings and was payable monthly on sales achieved, constituted normal remuneration. The question for the CA was whether the WTR could be interpreted to give effect to that position. Our blog on the earlier EAT decision is here.

‘Grain or thrust’ of WTR is to calculate holiday pay by reference to normal remuneration

The CA concluded that since the purpose of the WTR was to fulfil the UK’s obligations under the WTD (even if those were not necessarily apparent at the time of enactment), the ‘grain or thrust’ of the WTR can be interpreted to provide Mr Lock with an entitlement to have his holiday pay calculated by reference to his normal remuneration. This is consistent with the direction of travel of previous Employment Tribunal (ET) and Employment Appeal Tribunal (EAT) decisions.

Results-based commission – should it now be taken into account?

On the face of the CA decision, results-based commission akin to that received by Mr Lock, should now be taken into account in holiday pay. However,
employers may well wish to wait for the outcome of any appeal to the Supreme Court (British Gas is reportedly seeking leave to appeal) and, even then, depending of course on any outcome, further clarity from the ET on the continuing practical uncertainties as to how holiday pay is in fact calculated.

A 12 week reference period?

The CA was not drawn on the mechanics of how Mr Lock’s holiday pay should be calculated taking into account his results-based commission.

The original ET in the Lock litigation inserted a new sub-section into the WTR, essentially enabling Mr Lock’s holiday pay to be calculated under existing provisions (available to workers on different working arrangements) which provide for holiday pay to be calculated over a 12 week reference period. The CA criticised this new provision on the basis it was “expressed too widely insofar as it refers to all types of commission and not just to contractual “results-based commission” that is the subject of Mr Lock’s case“. It therefore favoured an “appropriate amendment” to the ET’s judgment to “more clearly confine it to the circumstances of his case“. Whilst not expressly attacking the 12 week reference period, the CA did state that it was saying “nothing” about what in any particular case was the appropriate reference period.

Where does this now leave employers?

Holiday pay is still very much a live issue, legally and practically. However, a satisfactory resolution may well still be some way off. Will Lock be appealed to the Supreme Court? What will an ET determine are the appropriate mechanics for calculating holiday pay where an employer operates a “results-based” commission scheme, similar to Mr Lock’s? Will that ET decision be appealed? And what is the position in respect of differently structured commission schemes and bonus schemes, alluded to as potentially difficult scenarios by the CA? The CA did not provide any substantive answer to this latter question, making it very clear that it was “no part of [its] function to do more than to deal with the instant appeal”.

Practically, employers should ensure that they continue to identify any areas of risk in their existing holiday pay calculations under the WTR and plan accordingly. Whilst the CA considered that the instances where holiday pay under the WTR calculations did not reflect normal remuneration were
limited, given the variety of pay structures and pay rates in play in many businesses, there may well be many more in practice.

Will Brexit provide a solution?

The Secretary of State for Business Innovation and Skills (now the Department of Business Energy and Industrial Strategy) has been a party to the Lock litigation since the EAT proceedings, essentially supporting Mr Lock’s position that his holiday pay should reflect his results-based commission (the government’s position being that the WTR are intended to implement the WTD). Brexit now potentially opens the door to the government reining in the requirements imposed by the WTD. However, with the new Prime Minister making it very clear that under her government there will be no erosion of workers rights, any dramatic changes to the course that the holiday pay litigation is taking us on, seems unlikely. Employers must simply hope that, at the very least, to the extent it is able, the government takes the opportunity to clarify the position on how holiday should be paid in legislation, rather than waiting for specific decisions on individual pay arrangements from our tribunals and courts.