Lock holiday pay case: a defining point between EU and UK law?

Author: Darren Newman

Consultant editor Darren Newman explains why an appeal to the Court of Appeal in the commission and holiday pay case of British Gas Trading Ltd v Lock could be a defining point in the relationship between EU and UK law. He also explains why the Government's view is that the Working Time Regulations are capable of being interpreted to comply with the Working Time Directive's requirement that commission should be included in holiday pay calculations.

The case of British Gas Trading Ltd v Lock is about much more than whether or not commission should be included in the calculation of holiday pay. It has the potential to become a leading case on the relationship between EU and UK law.

The story so far. Mr Lock worked in sales on a package that was heavily reliant on the commission he earned whenever he closed a deal. British Gas accepted that when he went on annual leave he lost the opportunity to earn commission, which meant that his commission payments further down the line would be lower than they would have been had he not taken leave. He brought a claim arguing that this meant that he was not receiving his full holiday entitlement and the case was referred to the European Court of Justice (ECJ). The ECJ held that the Working Time Directive (2003/88/EC) does indeed require that holiday pay should be calculated not just on the basis of the worker's basic pay but also on the basis of the commission that the employee would have earned.

Having answered the question on the interpretation of the Directive, the ECJ then sent the case back to the employment tribunal to decide the outcome. The problem faced by the tribunal was that, while there could no longer be any dispute about the requirements of the Directive, it was clear that, under the strict wording of the Working Time Regulations 1998 (SI 1998/1833), commission would not be included in the holiday pay calculation. Indeed the Court of Appeal had previously held - in Evans v Malley Organisation Ltd t/a First Business Support [2003] IRLR 156 CA - that, since the remuneration of a worker who earns commission does not vary with the amount of work done (only with the results of that work), holiday pay should be calculated on the basis of basic pay only.

In Evans the Court of Appeal did not consider the possibility that the Working Time Directive might require a different result. But we know now that it does. We have a direct contradiction between the Working Time Directive, which requires commission to be included in the calculation of holiday pay, and the Working Time Regulations 1998, which require commission to be excluded. How should this contradiction be resolved?

The starting point must be that the Working Time Regulations 1998 were passed to give effect to the Working Time Directive. Parliament's intention was to comply with the requirements of the Directive. There is also a general principle that domestic law has to be interpreted in such a way that it complies with EU law. The issue that Lock brings to the fore is how far the domestic courts can go in distorting the meaning of domestic legislation to achieve that result.

On this issue, the courts have shifted markedly in recent years. In Duke v GEC Reliance (formerly Reliance Systems Ltd) [1988] IRLR 118 HL, the House of Lords refused to interpret what was then the Sex Discrimination Act 1975 to comply with a ruling by the ECJ requiring employers to apply the same retirement age for both men and women. At that time, the Act expressly excluded claims based on differing retirement ages and the House of Lords was not prepared to disregard that.

Since then the UK courts have developed a much bolder approach. This has sometimes involved disregarding the express wording of legislation, or effectively adding whole new provisions, provided that any such interpretation does not "go against the grain" of the legislation viewed as a whole. For example, in EBR Attridge Law LLP and another v Coleman (No.2) [2010] IRLR 10 EAT, the Employment Appeal Tribunal (EAT) effectively added a new section in the Disability Discrimination Act 1995 allowing what has become known as "associative discrimination". More pertinently, the EAT in Bear Scotland Ltd and others v Fulton and others; Hertel (UK) Ltd v Woods and others; Amec Group Ltd v Law and others [2015] IRLR 15 EAT held that the calculation of holiday pay should include contractual overtime - even though that directly contradicts the statutory definition of a "week's pay".

When Mr Lock's case came back before the employment tribunal he successfully argued that the Working Time Regulations 1998 could be interpreted to comply with the Directive. The employer appealed, arguing that the Regulations should not be distorted in that way, but the EAT dismissed the appeal. If the EAT in Bear Scotland was entitled to interpret the Regulations to include overtime, it had to be accepted that the tribunal could interpret the Regulations to allow for the inclusion of commission. The employer tried to argue that Bear Scotland was wrongly decided and should not be followed, but the EAT refused to entertain that. Bear Scotland was not obviously wrong and the general principle was that the EAT should follow its own decisions.

Leave to appeal to the Court of Appeal has already been granted and this is where the case could get interesting. While the EAT may have felt obliged to follow Bear Scotland, the Court of Appeal will not. If it holds that the Regulations cannot bear the interpretation argued for by Mr Lock, the effect of that would also be to overrule the EAT in Bear Scotland. This case is no longer just about holiday pay and commission - it is also about the inclusion of overtime.

Given the Government's attempts to limit the scope of EU law and promote the sovereignty of Parliament, you might expect that it would be keen for the courts to take a less interventionist approach in interpreting the Working Time Regulations 1998. Not a bit of it. The Secretary of State for Business, Innovation and Skills has intervened in Lock to argue that the courts can indeed interpret the Regulations to comply with the ECJ's ruling. This is not really surprising. If the Court of Appeal decides that the Regulations do not require the inclusion of commission or overtime in holiday pay, that will open the Government up to claims from tens of thousands of workers for damages arising from the Government's failure to implement the Directive properly.

It has been clear for some years that our definition of a week's pay - borrowed as it is from the Contracts of Employment Act 1963 - does not properly implement the EU's requirement that workers on annual leave are paid the amount they normally receive when they are at work. Successive governments have failed to grasp that nettle and the result is that the courts have to do the work for them. By the time Lock comes to the Court of Appeal our referendum on EU membership will be over and done with, and we will know whether or not Brexit will be a reality. If we decide to stay in the EU, perhaps the Government can finally get around to amending the Working Time Regulations 1998 so that they actually comply with the Directive.

perspective@xperthr.co.uk