Holiday pay: British Gas appeal to EAT fails

The Employment Appeal Tribunal (EAT) has upheld the employment tribunal’s finding in the case of Lock v British Gas that the Working Time Regulations (“WTR”) can be interpreted so as to be compatible with the EU Working Time Directive, with the effect that results-based commission payments should be included in the calculation of holiday pay.

Background

Mr Lock was employed by British Gas as a salesman and his basic salary was heavily supplemented by commission he earned for customer sales, which represented around 60% of his basic pay. When he took holiday he was paid his basic pay and any commission which he had earned in previous weeks but which happened to be paid during that time. He lost out on the chance to earn commission whilst on holiday and so his commission payments were lower during the months that followed as a result of taking holiday.

In 2012 Mr Lock brought a claim for unlawful deduction from wages, arguing that, following the European Court of Justice (ECJ) case of British Airways plc v Williams, holiday pay should reflect the income that he would usually receive had he been working. The Lock case was referred to the ECJ as well who agreed that Mr Lock’s holiday pay calculation was not permissible under the EU Working Time Directive and the case returned to the employment tribunal last year to determine whether the WTR could be interpreted to conform with EU law.

The tribunal found in Mr Lock’s favour, relying on the EAT judgment in Bear Scotland and others,  the other leading holiday pay case, which was heard after the ECJ judgment in Lock but which concerned non-guaranteed overtime. The EAT found in the employees’ favour in the Bear Scotland case on the inclusion of non-guaranteed overtime in the calculation of holiday pay and held that the WTR can be interpreted to conform with EU law.

British Gas appealed against the tribunal decision, arguing that Mr Lock’s case could be distinguished from Bear Scotland or alternatively that the Bear Scotland judgment should not be followed.

The EAT decision in Lock

In reaching its decision the EAT held that:

• Although Bear Scotland concerned non-guaranteed overtime and Mr Lock’s claim concerned results-based commission, there was no basis on which Bear Scotland is distinguishable from Lock.
• Although the EAT is not bound by its earlier decisions, they are of persuasive authority and it will follow them as a general principle unless established exceptions applied. The EAT considered the relevant exceptions  in respect of the Bear Scotland case, namely whether it was manifestly wrong or where there are other exceptional circumstances, but found neither was the case and dismissed British Gas’ appeal, upholding the Tribunal’s judgment  that the WTR could be read to conform with EU law in the case of Mr Lock.

In the absence of any established exceptions applying, the EAT refused to reconsider the merits of the substantive argument of whether the WTR can be read to conform with EU law, noting it would create uncertainty and if it did there would be nothing to stop a differently constituted EAT taking a different view in a third case at some point in the future.

What does this mean for employers?

The legal position

It is well established through EU and UK case law that workers must receive their “normal remuneration” during their 4 week annual leave entitlement under the EU Working Time Directive, i.e. all sums intrinsically linked to the performance of tasks that the worker is required to carry out under the contract of employment. So far this has been held to include the following payments where they are paid sufficiently regularly: commission, non-guaranteed overtime, travel allowances, productivity and attendance bonuses, standby and emergency call-out payments and acting-up supplements.

The main battlefield is whether the WTR can be read to allow this and conform with EU law and we now have two EAT decisions agreeing that it can.  However, the EAT judgment in Lock does little to resolve the uncertainty surrounding the law on holiday pay.  It is interesting to note that the EAT in Lock was simply following the Bear Scotland decision as a result of the general principle that the EAT will normally follow one of its own decisions.  It therefore did not reconsider the substantive merits of the case, adding that if Bear Scotland was wrongly decided then it was for the Court of Appeal to say so, not the EAT.  This leaves the door open to future argument in the higher courts on the question of whether the WTR can be read to conform with EU law either in the Lock case itself (if British Gas appeal to the Court of Appeal) or a subsequent case. We will continue to follow this issue closely and provide a further update when we have clarity.  In the meantime, tribunals will be bound to follow the EAT decisions in Bear Scotland and Lock.

In practice

Employers who pay their staff elements of pay in addition to basic pay and have delayed reviewing their holiday pay practices may (continue to) face challenges, grievances and claims from employees in light of the Lock judgment. In addition, tribunal cases that are stayed pending the Lock outcome are likely to become live again (although a further appeal in the Lock case may impact the decision on a stay). It remains the case, though, that any gap of more than 3 months between any unlawful deductions will break the chain of deductions going back in time and claims lodged on or after 1 July 2015 cannot go back more than 2 years in any event.

On a separate point, there is the possibility that the position on holiday pay could change again depending on the outcome of the EU Referendum on 23 June 2016 regarding whether the UK should remain a member of the EU. However, even if there is a vote for exit, the issue of what to do about the WTR in general is likely to remain uncertain and controversial for a considerable time. Plus, it is unlikely that the impact of a UK exit from the EU at some point in the future would have retrospective effect in respect of holiday payments.

It remains the case then that, if implementing any changes to the calculation of holiday pay, it would be wise to build flexibility into any such changes and retain the ability to alter any agreement according to future legal developments.