Holiday pay: British Gas refused permission to appeal to the Supreme Court

Many employers have been closely following the important holiday pay litigation in the case of British Gas v Lock, where Mr Lock contended that he was entitled to be paid notional results-based commission for the period he was on holiday between 19 December 2011 and 3 January 2012. Following an unsuccessful appeal to the Court of Appeal, UNISON has confirmed that British Gas has been refused permission to appeal to the Supreme Court. What does this mean now for the inclusion of commission in holiday pay?

Following a referral to the Court of Justice of the European Union (CJEU), which decided in 2014 that commission such as Mr Lock’s should be included in the calculation of his holiday pay, the Leicester Employment Tribunal ruled in 2015 that it could read words into the UK’s Working Time Regulations 1998 to give effect to the CJEU’s decision. British Gas appealed unsuccessfully to the EAT and then again unsuccessfully to the Court of Appeal which gave its judgment last October.

What does this mean for employers?

The fact that the Supreme Court has refused British Gas permission to appeal now means that the position is (relatively) settled on the basis of the Court of Appeal ruling. Under previous UK case law, workers with normal working hours did not have to be paid holiday pay referable to the amount of results-based commission they earned, but only for the amount due under their contract for their normal working hours. Now, if a worker has normal working hours and they earn results-based commission (for example where the individual earns commission based on sales achieved), then an element of that commission will have to be included in their holiday pay.

Note, though, that this only applies to the 4 weeks’ holiday guaranteed by the Working Time Directive and not the UK’s additional 1.6 weeks’ statutory holiday or additional contractual holiday.

Those without normal working hours already have to receive holiday pay based on their average earnings, including commission, for the preceding 12 weeks.

What is the reference period?

One of the key questions in the mind of employers is, if notional commission must now be included in holiday pay for those with normal working hours, what reference period should be used to calculate how much commission a worker normally earns? The CJEU thought that it should be a ‘representative’ reference period, but left interpretation of this up to the UK courts to decide.

The Leicester ET in its original decision stated that it was not deciding this point, but in fact it appeared to do so because of the wording it suggested should be ‘read into’ the Working Time Regulations 1998. The effect of the decision in Mr Lock’s case is that his holiday pay should be calculated at an average hourly rate based on remuneration payable to him over the 12 weeks prior to the first day of his holiday.

In addition, the Court of Appeal judgment referred to a subsequent order by the ET, following agreement by Mr Lock and British Gas, that the reference period in his case should be 12 weeks. There is, however, a note of caution: for many employers, such a reference period may well not be representative. Consider, for example, staff whose commission varies significantly depending on the time of year – perhaps whose sales are highest over Christmas or over a summer period. Or indeed staff who only get a commission or incentive bonus payment once a year. It is open to employers to argue in such cases that the reference period should not be the 12 weeks prior to the holiday. Indeed, the Court of Appeal made very clear that it was not deciding general principles about the reference period and that this ruling was confined to Mr Lock’s case. Employers will be left to make their own judgment (and potentially defend it in an Employment Tribunal), but this could be a useful negotiating tool for settlements with staff or unions.

What happens now?

Employers who have not yet decided whether or how they will include results-based commission in holiday pay now have some more certainty, although they will have to draw their own conclusions in relation to the appropriate reference period. Backdated claims for holiday pay will be limited in some circumstances.

In addition, we await with interest the final outcome of the Leicester ET case, which has not yet ruled on whether the commission scheme already effectively compensated Mr Lock for the period of holiday (albeit unlawfully – i.e. holiday pay was already ‘rolled up’ into the amounts paid under the commission scheme), or on what amount Mr Lock should be awarded. We will keep you updated when this outcome is known.

Finally, will Brexit have any impact? Watch this space.