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Employment Law Update

End of the road for British Gas’s appeal about holiday pay and commission payments

The Supreme Court has refused to allow British Gas to appeal against the Court of Appeal’s decision in the long running case about commission involving one of its sales staff, Mr Lock. This means that it must compensate Mr Lock for his inability to earn commission when he was on holiday.

Does this mean that employers must now include all commission payments in holiday pay and/or compensate commission based employees when they take a holiday?

Background to the case

In 2014, the ECJ ruled that Mr Lock should, as a matter of EU law, have commission included in his holiday pay. He was paid a basic salary of £14,670 per year plus commission which was linked to his performance as an ‘energy trader’ (his job was to obtain new customers for British Gas, and persuade existing ones to upgrade their accounts).

Mr Lock did receive the benefit of the commission he had already earned when he took annual leave, but he complained that he could not earn commission during his holiday which impacted on the salary he received in later months. He argued that his salary should have been enhanced to reflect the amount of commission he would have earned, otherwise this could deter workers from taking a holiday.

The ECJ agreed. To understand the reasoning for this decision, it is necessary to consider the rationale, which underpins the Working Time Directive. The requirement to provide workers with paid holiday is a health and safety initiative – implemented to ensure that workers take a break from the demands and stresses of work. It is regarded as a particularly important principle of social law, from which there can be no derogations.

Workers must not be discouraged from taking leave. Therefore the pay they receive whilst absent, must generally correspond to what they would have received, had they been at work.

In Mr Lock’s case, commission amounted to 60% of his earnings, and he could not earn commission whilst on holiday – a clear deterrent from taking time off.

The case then returned to the Employment Tribunal, where the question for determination was whether the Working Time Regulations could be interpreted so as to give effect to EU law. The Tribunal found that the UK legislation could be read so as to be consistent with the ECJ’s decision and it achieved this by adding new wording to the Regulations. British Gas’s subsequent appeal to the Employment Appeal Tribunal failed as did its appeal to the Court of Appeal.

The Court of Appeal’s decision

The Court, despite some reservations, agreed that the Working Time Regulations could be read purposively to comply with the Working Time Directive (as interpreted by the ECJ) and that Mr Lock was entitled to receive his “normal pay” when on holiday and should not be otherwise disadvantaged by taking a holiday.

In essence, this means that workers whose remuneration includes regular “result based” commission should have their holiday pay calculated in the same way as workers whose pay varies according to how much work they actually do. These types of commission payments will have to be included in the calculation.

British Gas sought to appeal against this decision to the Supreme Court, but its application has now failed with the Supreme Court failing to grant permission to appeal, presumably because it does not think that British Gas has sufficient grounds to do so. This means that the decision of the Court of Appeal is now binding.

How much compensation will Mr Lock receive?

Unless the parties reach a settlement, the Employment Tribunal will schedule another hearing to determine the amount of compensation British Gas has to pay to ensure that workers like Mr Lock are not disadvantaged by taking a holiday in those circumstances. This is likely to be done by averaging his pay over a given reference period which, the parties have already agreed, will be 12 weeks (prior to taking the annual leave itself).

Mr Lock is only complaining about lost income over a two-week period so his compensation is likely to be relatively modest. However, around a thousand other British Gas employees have brought similar claims and its total exposure to underpayment of holiday is likely to be substantial and unless it has made changes to its policy, these will be on going.

Do employers now have to include all commission payments made to staff in their holiday pay?

No. The Court of Appeal made it very clear that its judgment only applied to “results based” commission schemes and it does not mean that all commission schemes have to be included. Mr Lock’s commission scheme was straightforward and he was paid according to the outcome of his own work and it was very clear that Mr Lock suffered a loss when he took a holiday.

Ascertaining loss will not be as straightforward in other cases where, for example, commission is paid annually, or where the scheme involves discretionary assessments based on a worker’s broader contribution or where this is in part based on individual performance as well as team performance. The Court of Appeal made it very clear that its decision in this case will not bind future Tribunals who are examining different types of scheme.

Will “Brexit” make any difference to how holiday pay is calculated?

The decision to trigger our exit from the EU later this month does not currently make a difference to how holiday pay is calculated and whilst we remain a member of the EU, we are required to interpret UK legislation in line with European Directives and decisions of the ECJ.

However, that may change. The Government has said that it will end the jurisdiction of the ECJ in the UK. The “Great Repeal Bill” (not yet drafted) will end the authority of EU law by converting all of its provisions into UK law on the day we exit (possibly as early as March 2019, if we trigger the Article 50 notice by March 2017). According to the Government, this will give the UK the opportunity to scrutinise, amend, repeal or improve any aspect of EU law in the future.

This will not mean however that all of our employment laws fall away, but the intention of the legislation appears to be that ECJ interpretations (based on Directives) will no longer bind our UK courts and tribunals. That is likely to have a profound effect on holiday pay cases as the challenges have been based on the failure to properly implement the social ambitions contained in the (European) Working Time Directive and going forward, employers may use the UK’s exit from the EU as a “springboard” to argue that the holiday pay cases have in fact been wrongly decided and therefore leave them open to challenge.

Published: 6 March 2017

Employment Law Update - March 2017

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