Commission and holiday pay update: Lock v British Gas decision is to be appealed

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It has been confirmed that British Gas will be appealing against the Employment Tribunal’s decision, issued in March 2015, that employers must take account of commission when calculating holiday pay under the Working Time Regulations 1998.

The appeal is likely to be heard by the end of this year. The outcome could reverse the Employment Tribunal’s decision that UK legislation can be interpreted to mean that commission must be included in holiday pay for employees with normal working hours. The appeal has wider reaching implications too as it may also challenge the position regarding holiday pay and overtime following the EAT’s decision in Bear Scotland in 2014.

Reminder of the issues

  • Mr Lock brought an Employment Tribunal claim against British Gas claiming that his holiday pay calculation should have included commission.
  • The Tribunal asked the Court of Justice of the European Union (CJEU) to consider whether holiday pay should be calculated in such a way as to reflect the loss of commission caused by being away on leave.
  • The CJEU held that as Mr Lock’s commission was intrinsically linked to his contractual duties it must be taken into account when calculating holiday pay. It referred the case back to the original Employment Tribunal to determine how this ruling should be applied to UK law.
  • The Employment Tribunal heard the remitted case in March 2015. It added wording to the Working Time Regulations 1998 which effectively meant that employees with normal working hours who received commission should have that commission included in the calculation of their holiday pay.
  • The EAT had already decided in November 2014 that regular non-guaranteed overtime should be included in holiday pay using in the Bear Scotland case. The Tribunal in Mr Lock’s claim used a similar approach to construct the UK legislation when deciding that commission should also be included in the calculation of holiday pay.
  • However, these decisions only apply to the first 4 weeks’ of an employee’s holiday pay (i.e. the minimum holiday required under European law). They do not apply to any additional holiday, including (i) the remaining 1.6 weeks’ minimum holiday required under UK law and (ii) any additional contractual holiday that employers choose to provide.

What are the grounds of British Gas’s appeal?

The lawyers for British Gas have confirmed the grounds of appeal they are putting forward are twofold, as follows:

  • Commission and non-guaranteed overtime are dealt with under different provisions, which use different language. The Tribunal incorrectly concluded that Bear Scotland (which was about overtime) had any bearing on the outcome of Lock (which was about commission).
  • In any event, the EAT in Bear Scotland incorrectly concluded that UK domestic law could be interpreted purposively to give effect to EU law.

Implications – what does this mean for employers?

The implications of this appeal are potentially significant. If the EAT finds that the purposive interpretation adopted both by the EAT in Bear Scotland and the ET in Lock were incorrect then it could turn the whole holiday pay issue on its head once more. We may end up with two conflicting EAT decisions (the EAT cannot overturn its own decisions) in which case a further appeal to the higher courts will be almost inevitable. This will lead to a further long period of uncertainty for both employers and employees alike.

If the appeal is unsuccessful, it is hoped that the EAT will provide further guidance on the specific way in which commission should be factored into holiday pay as this was not clarified by the Employment Tribunal.

Key points to note are:
  • Whatever happens, the rule that claims for unpaid holiday cannot go back more than 3 months (as set out by the EAT in Bear Scotland) is not under challenge and will remain in place. The government has also introduced legislation to limit any claims submitted from 1 July 2015 onwards from claiming a maximum of 2 years’ back pay for any underpaid holiday pay.
  • Employers are likely to want to request a further stay of any ongoing litigation on this issue pending the outcome of this appeal. This may provide a tactical advantage and could therefore be seen by many employers as a positive.
  • Employers who are currently in discussions with Unions or employee bodies about calculation of holiday pay may wish to take stock of this latest development before proceeding further.
  • Employers can take comfort from the thought that, whatever the eventual outcome, it is unlikely that they will be in any worse position as a result of this appeal. Either the current position will be confirmed as correct or it is possible that we return to the position where holiday pay does not need to factor in commission or overtime. In our view the former is more likely than the latter but watch this space!

We recommend that employers should continue to review their position and consider taking steps including:

  • Reducing overtime and commission payments where possible.
  • Changing holiday pay calculations going forwards to ‘break’ any chain of deductions for underpaid holiday pay.
  • Accruing a financial contingency for future liability under holiday pay claims.

We have advised many employers on holiday pay issues and can help you to plan for the outcome of the latest cases.

We will be monitoring the progress of this appeal and will post further updates when they are available