Court of Appeal hears Lock holiday pay case
The Court of Appeal has heard the appeal in the important holiday pay case British Gas Trading Ltd v Lock and another, in which it is considering the application to UK law of the European Court of Justice (ECJ) ruling that commission must be included in holiday pay calculations.
UPDATE: The Court of Appeal published the judgment in this case on 7 October 2016. See British Gas Trading Ltd v Lock and another for a law report on the judgment and guidance on the implications for employers.
Parties in the EAT
- Appellant: British Gas Trading Ltd
- Respondent: Mr Lock
- Intervener: Secretary of State for Business, Innovations and Skills
This case is one of a number of important cases in the last few years on what employers need to include when calculating holiday pay.
Case law had led employers to believe that workers' basic pay was all that had to be included in holiday pay calculations. The leading case was Bamsey and others v Albon Engineering & Manufacturing plc, in which the Court of Appeal held that holiday pay does not have to include non-guaranteed overtime.
Similarly, in Evans v Malley Organisation Ltd t/a First Business Support, the Court of Appeal found that a worker's holiday payments on the termination of his employment could be calculated by reference to his basic pay alone, and not his average pay including commission.
However, a number of judgments in the last few years have found that employers do have to take account of other payments when working out holiday pay.
In Williams and others v British Airways plc, the ECJ held that pilots' flying allowances must be added to holiday pay.
In Bear Scotland Ltd and others v Fulton and others; Hertel (UK) Ltd v Woods and others; Amec Group Ltd v Law and others, the EAT held that holiday pay must cover regular overtime that the workers were required to perform if asked, but that their employers were not contractually obliged to offer. Further, the EAT held that travelling-time payments also had to be reflected.
Mr Lock's claim
Mr Lock, a sales consultant with British Gas, claimed in the employment tribunal that he was owed money on the basis that his holiday pay did not reflect what he would have earned from results-based commission. On top of his basic pay, he is paid monthly commission, which fluctuates based on his sales.
The tribunal asked the ECJ for clarification on whether or not it was a breach of the Working Time Directive (2003/88/EC) for the Working Time Regulations 1998 (SI 1998/1833) to limit the calculation of a week's pay for the purposes of annual leave to basic pay and to exclude commission that would have been earned had annual leave not been taken.
In Lock v British Gas Trading Ltd, the ECJ held that a worker's commission payments must be included in the calculation of his or her holiday pay.
The ECJ said that a failure to pay normal remuneration - including commission - in respect of annual leave is contrary to the objective of art.7 of the Working Time Directive because it could deter a worker from taking the leave to which he or she is entitled, particularly where commission payments constitute a substantial proportion of total remuneration.
Words in italics added to Working Time Regulations 1998
Payment in respect of periods of leave
16 (1) A worker is entitled to be paid in respect of any period of annual leave to which he is entitled under regulation 13, at the rate of a week's pay in respect of each week of leave.
(2) Sections 221 to 224 of the 1996 Act shall apply for the purpose of determining the amount of a week's pay for the purposes of this regulation, subject to the modifications set out in paragraph (3).
(3) The provisions referred to in paragraph (2) shall apply:
(a) as if references to the employee were references to the worker;
(b) as if references to the employee's contract of employment were references to the worker's contract;
(c) as if the calculation date were the first day of the period of leave in question; and
(d) as if the references to sections 227 and 228 did not apply.
(e) as if, in the case of the entitlement under Regulation 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purpose of section 221.
Employment tribunal decision
On the return of the case to the UK jurisdiction to apply the ECJ judgment, the employment tribunal found for Mr Lock (Lock v British Gas Trading Ltd and another).
The tribunal read a new reg.16(3)(e) into the Working Time Regulations 1998 to comply with the Working Time Directive (see box on right).
The employment tribunal relied on both the guidance it had been given by the ECJ and the then recently decided Bear Scotland judgment on overtime in holiday pay by Mr Justice Langstaff, the President of the EAT.
British Gas appealed to the EAT against the employment tribunal decision.
In Lock and another v British Gas Trading Ltd (No.2), the key to the appeal was whether or not the EAT should follow its own earlier decision in Bear Scotland.
The EAT held that the case against British Gas could not be distinguished from Bear Scotland. The EAT stressed that the employer's representatives were unable to offer any basis within the statutory language for different results in Lock (on commission) and Bear Scotland (on overtime).
The EAT dismissed the appeal. It found that if Bear Scotland is wrongly decided, it should be left to the Court of Appeal to say so.
British Gas appealed to the Court of Appeal.
The Court of Appeal heard the case on 11 July 2016.
Main issues in the Court of Appeal
The key issues before the Court of Appeal were:
- Do the words added by the tribunal in light of the ECJ decision go "against the grain" of the legislation, making it impermissible for the tribunal to add them?
- If the answer is no, the additional wording must be revised to have a narrower ambit. The words added to the legislation can apply only to workers who have normal working hours and whose pay does not vary according to the amount of work done, but who receive individual results-based commission as part of their normal remuneration.
In the Court of Appeal's view, it cannot rely on Bamsey because it is an "unsatisfactory" and "muddled" decision.
British Gas's arguments
British Gas's arguments included the following:
- Parliament made a decision to define pay in a particular way by importing ss.221 to 224 of the Employment Rights Act 1996 into the Working Time Regulations 1998. UK law cannot be set aside by courts and tribunals and what the employment tribunal did was "to turn domestic legislation on its head".
- The tribunal's additional wording to s.16 of the Working Time Regulations goes "against the grain" of the legislation and is contra legem, contrary to the law.
- The use of the words "commission or similar payment" in the tribunal's addition to the legislation is too wide and gives rise to practical difficulties that "stray beyond the boundaries of a well-trodden path" . For example, the wording is not limited to individual results-based commission and the length of the relevant reference period for averaging a week's pay with the weekly amount of the commission or similar payment is not addressed.
- A ruling for the employer would not deprive the ECJ Lock decision of its effect. It would simply mean that Parliament, not the courts and tribunals, would have to make the necessary amendments to the legislation.
- The EAT decision in Bear Scotland is not binding on the Court of Appeal and, in any event, commission is not the same as overtime.
- Having relied on Bamsey in earlier submissions, it was conceded that the decision is muddled and unsatisfactory and that there are difficulties in relying on it.
Mr Lock's arguments
Mr Lock's representatives argued the following:
- The Working Time Regulations were passed "wholly to implement the Directive and for no other reasons". The courts must assume that Parliament's actual and presumed intention is that the UK fulfils the obligations of the Directive and, for this reason, the employment tribunal correctly read words into the Working Time Regulations 1998 to comply with the ECJ Lock ruling.
- The thrust of the Regulations is that annual leave is paid and the adoption of ss.221 to 224 of the Employment Rights Act 1996 is merely a convenient means to provide for such payment. There is no clear unequivocal exclusion of commission. Sections 221 to 224 were imported from the Contracts of Employment Act 1963 and that regime "is required to operate in updated times".
- The exact choice of words used to comply with the ECJ Lock ruling are not particularly important. The main concern is that they give effect to the ECJ judgment and cover Mr Lock's specific circumstances.
- The Bear Scotland decision on overtime is equally applicable to results-based commission.
Cases cited before the EAT
- Bear Scotland Ltd and others v Fulton and others; Hertel (UK) Ltd v Woods and others; Amec Group Ltd v Law and others
- Bamsey and others v Albon Engineering & Manufacturing plc
- British Airways plc v Williams and others
- Evans v Malley Organisation Ltd t/a First Business Support
- Pfeiffer and others v Deutsches Rotes Kreuz, Kreisverband Waldshut eV
- Marleasing SA v La Comercial Internacional de Alimentacion SA
- Duke v GEC Reliance (formerly Reliance Systems Ltd)
Secretary of State's arguments
The arguments on behalf of the Secretary of State, intervening in the case, largely complemented those put forward on behalf of Mr Lock. The Secretary of State's arguments included the following:
- The fundamental purpose of the annual leave provisions in the Working Time Directive is to make sure that workers are paid in full during annual leave, encouraging them to take holiday for health and safety reasons. If workers on commission are denied what they are normally paid, they will be discouraged from taking annual leave.
- The employment tribunal interpreted the law correctly and the tribunal was entitled to read words into the Working Time Regulations to comply with the ECJ Lock ruling.
- The words used to comply with the Lock ruling can be tweaked to apply only to results-based commission that is directly connected to work done on an individual basis.
- The additional wording does not give rise to any insurmountable practical problems. The length of the relevant reference period for averaging Mr Lock's commission payment is not a statutory issue and is capable of being determined by the tribunal, if the parties cannot agree.
What happens next?
The Court of Appeal said at the end of the one-day hearing that it would deliver the decision as soon as reasonably possible.
Judgments on issues of this complexity normally take two to three months to be delivered.