Court of Appeal Rules on Holiday Pay and Unearned Commission

The Court of Appeal has handed down its ruling in Lock v British Gas Trading Limited and Others, concluding that the Employment Tribunal (ET) was correct in its finding that the Working Time Regulations 1998 (WTR) can be interpreted so as to conform with EU law in respect of holiday pay and the Employment Appeal Tribunal was correct to uphold this decision.

Mr Lock's normal pay included a commission based on sales in the previous month, and this represented on average more than 60 per cent of his remuneration. As he could not achieve sales whilst on annual holiday, this meant that his pay for the month following was lower than usual. He brought an ET claim for unlawful deduction from wages.

Prior to reaching its decision, the ET had sought guidance on the matter from the Court of Justice of the European Union (CJEU), which ruled that any reduction in a worker's remuneration in respect of his paid annual leave that would be liable to deter him from actually exercising his right to take that leave is contrary to the objective pursued by Article 7 of the EU Working Time Directive (WTD). Member states are therefore required to ensure that holiday pay is calculated by reference to a worker's 'normal remuneration'.

As regards how the commission-based element of holiday pay should be calculated, the CJEU considered this must be assessed by the national court or tribunal on the basis of the rules and criteria set out by the case law of the CJEU and taking into account the objective pursued by Article 7 of the WTD.

The ET held that the WTR should be interpreted in a way that gives effect to the WTD and Mr Lock's holiday pay should therefore include commission. It expressed confidence that its decision as regards the interpretation of the WTR was in line with the underlying intention of Parliament to accurately transcribe the WTD into UK law. The Court of Appeal went on to say that that presumption also encompasses an intention to fulfil those requirements of the WTD that were not apparent at the time it was enacted but which only became clear at a later date.

The Court of Appeal agreed that this was a case in which the 'grain or thrust' of the WTR could fairly be identified as providing that workers' holiday pay should be measured by reference to criteria required by Article 7 as since elucidated by the CJEU. Mr Lock was, therefore, entitled to have his holiday pay calculated by reference to his normal remuneration.

In dismissing British Gas's appeal, the Court has affirmed the position that holiday pay of just basic salary on its own is not sufficient if this is not the worker's normal remuneration, which has been defined as remuneration that is 'linked intrinsically to the performance of the tasks which the worker is contractually required to carry out under his contract of employment and in respect of which a monetary amount is provided' (British Airways plc v Williams).

The Court was, however, at pains to stress that its function was to do no more than deal with the current appeal and its ruling was confined to the particular facts of Mr Lock's case. Different facts might result in different outcomes – for example in the case of a salaried banker who receives a large, yearly results-based bonus. Different types of case will raise different questions. In addition, the Court was silent on the appropriate reference period for the calculation of the holiday pay.

The Court acknowledged that its decision leaves unanswered questions, but 'nothing in this judgment is intended to answer them'.