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David Robinson Young an employment law barrister with Dere Street Barristers Chambers in Newcastle and York has kindly written this analysis of the latest chapter in the holiday pay saga which rests with the recent Court of Appeal decision from last week. You can find out more about David at the end of his article…

For many years the extent of holiday pay and leave that a worker was entitled to was a matter for contractual negotiation. That all changed with the enactment of the Working Time Regulations which laid down a statutory minimum for both. The law regarding holiday pay was settled - or so we all thought, until cracks started to appear in the Working Time Regulations and doubts arose as to whether domestic UK law had properly given effect to the European Directive as it was required to. 

In the latest development the Court of Appeal has handed down its decision in British Gas Ltd v Lock . 

British Gas appealed against a decision of the Employment Appeal Tribunal. Literally thousands of like claims had been stayed, of which 918 were against British Gas, pending the outcome of the appeal.

In 2012 Mr Lock, who was employed as a sales consultant by British Gas, brought a claim against his employers setting out that in calculating his holiday pay they had failed to take into consideration the commission element of his pay. Those reading this will no doubt be familiar with parallel cases,  which argued claims on grounds not dissimilar to Lock. The commission element amounted to approximately 60% of Mr Lock’s pay. The upshot of the method of calculation used was that during the period Mr Lock took holiday as he was unable to generate sales commission income he was paid at his basic rate and; accordingly, whilst on holiday his absence resulted in a significantly reduced pay in the immediate period following his return. Essentially, Mr Lock’s claim was for unlawful deductions brought under s.13 of the Employment Rights Act 1996.

The Law
The legislative background establishing the right to paid holiday emanates from Article 7 of the Working Time Directive  which was given national effect in the United Kingdom by the Working Time Regulations 1998 (WTR).   Regulation 16 WTR sets out a worker is entitled to be paid at the rate of a week’s pay in respect of each week of leave; then goes on to say the amount of a week’s pay shall be determined by reference to ss 221 to 224 of the Employment Rights Act 1996. If an employee’s pay does not vary with the amount of work done, in other words if he has normal working hours, his normal week’s pay will be the amount payable for each leave week. This could be the case for example for salaried workers whose pay is fixed irrespective of work done.  However if the employee’s pay does vary with the amount of work done then, a week’s pay for holiday purposes will be calculated by reference to the average pay for the previous 12 weeks.  

The Employment Tribunal, which originally heard the Lock case, stayed the proceedings and asked for a preliminary ruling from the CJEU (First Chamber). The question was whether, in the case of a worker whose remuneration normally consists of a basic pay, plus commission that is fixed by reference to contracts entered into as a result of sales achieved, Article 7 limits the workers’ holiday pay to remuneration composed only of basic pay.

The Judgment of the CJEU  held this was not the effect of Article 7, and that paid annual leave as set out in Article 7.1 means that for the duration of annual leave remuneration must be maintained and, workers must receive their normal remuneration for that period of rest.  The CJEU went on to say that the purpose of providing payment for that leave was to put the worker during periods of leave, in a position which is as regards salary comparable to periods of work. The court rejected the argument put forward by British Gas that in fact Mr Lock was paid both basic pay and commission during his leave period earned before he took leave. The obvious flaw in this argument was that Mr Lock still faced the disadvantage that whilst on leave he was unable to generate any sales - and therefore earn commission that would be paid to him thus adversely affecting his future pay. This in the courts view was likely to deter a worker from taking his holiday entitlement and was therefore contrary to the spirit of the Directive. The conclusion was that domestic legislation under which a worker’s holiday pay was calculated solely by reference to basic pay did not give effect to the Directive and was therefore wrong. The answer was that a worker’s holiday pay should correspond to his ‘normal remuneration’. Where a worker’s pay was composed of several component parts the determination of the normal remuneration to which a worker was entitled during holiday periods would require a ‘specific analysis’ and the court made it clear that in the case of Mr Lock his commission should be taken into account.

Following the CJEU’s preliminary ruling the case was returned to the Employment Tribunal which recognised Mr Lock’s entitlement as a matter of EU law. British gas however, argued that while the sense of article 7 was clear, the Working Time Regulations that gave effect to the Directive was not. Not only did the Regulations not provide for results based commission to be taken into account when determining the amount of holiday pay, their interpretation shows it is not to be taken into account. This was an important point because though a Directive which has not been correctly or fully transposed into national law may be directly relied upon by an individual against the member state, or against state bodies (emanations of the state), the same does not apply in relation to an individual’s claim against a private sector entity such as British Gas. If Mr Lock was to succeed he had to show that the Regulations could be interpreted in conformity with article 7, as now explained by the EU.

The Employment Tribunal referred to the decision in the Bear Scotland case as to whether non-guaranteed overtime had to be taken into consideration when calculating holiday pay for the purposes of article 7. In this case the Employment Appeal Tribunal having satisfied itself that for the purposes of article 7, non-guaranteed overtime should be included in leave pay, it had gone on to insert additional words into the Regulations in order that they could be construed to conform with the requirements of the Directive. 

In Lock the Employment Tribunal performed a similar exercise with 16(3)(e) of the WTR by inserting: 
‘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 purposes of s. 221’.

The decision of the Tribunal was appealed to the Employment Appeal Tribunal which held, contrary to the arguments of British Gas, that Bear Scotland was not distinguishable. The judgment led to an appeal to the Court of Appeal which of course was not bound by the decision in Bear Scotland.

The Court of Appeal in its judgment reasoned that the WTR pre-dated the CJEU decisions that explained the requirements of Article 7 as for holiday pay. The Directive was enacted in language that apparently delegated the right to determine all aspects of holiday pay, including its calculation, to the member state. This was achieved by adopting a suite of statutory provisions dating from 1963 which do not provide for holiday pay to match normal remuneration in the cases like Lock concerning commission, and those involving non-guaranteed overtime such as Bear Scotland. It was agreed that the UK government had intended by the WTR to entirely fulfil its obligations under the Directive, including an intention to fulfil those requirements which were uncertain until clarified by the CJEU. The UK government could not reasonably have been aware of the true requirements of article 7 when it enacted the WTR until the CJEU gave a fully reasoned explanation of what those requirements were.

The WTR were to be regarded as implementing provisions that in almost every respect implement the Directive - as explained by the CJEU; however, in two anomalous types of cases, Lock being one of them, they provide for a lower calculation of holiday pay than article 7 in fact requires. The thrust of the WTR was to provide holiday pay for workers measured by reference to article 7. In order to interpret the WTR and make the meaning clear words such as those used by the Employment Tribunal, must be implied into it. Mr Lock was therefore entitled to have his holiday pay calculated by taking into consideration not only his basic pay but also his commission. The Employment Tribunal had been correct to interpret the WTR as it had done and the Employment Appeal Tribunal had been correct to uphold the decision.

The judgment in Lock although not changing a great deal following the Employment Appeal Tribunal‘s decision in Bear Scotland, gives the ratio a higher judicial authority. It is doubtful however that this marks an end to the matter and it is anticipated that further appeals will follow.

In so far as the Lock decision is concerned, employers who pay their employees an element of commission as part of an employees’ package would be well advised to take this commission into consideration when calculating holiday pay. This can be achieved by reference to the employees previous 12 full weeks’ salary. Failure to calculate holiday pay correctly and in accordance with the determination of the Court of Appeal may end in costly litigation and ultimately an order to repay the shortfall in pay to the employee. 

The same advice applies to employers who pay their employees non-guaranteed overtime, this element of pay should also be taken into account.

Where a worker believes he has received an under-payment of his wages, he has 3 months from the date of the underpayment, or the last in a series of underpayments to make a claim to the Employment Tribunal. This rule applies in claims for underpayments of holiday pay and no doubt will apply in Lock type cases. The normal rules under s.23 ERA apply. The statute provides that a Tribunal loses jurisdiction to consider a complaint that there has been a deduction from wages unless it is brought within 3 months of the deduction or the last in a series of deductions brought under ss23(2) and (3) ERA unless it was not reasonably practicable for the complaint to be presented within that 3 month period. 

The UK Government enacted the Deduction from Wages (Limitation) Regulations 2014 on 8 January 2015, which amend s.23 of the ERA to impose a cap of two years on some claims for back pay. Under the new s.23(4)A, a tribunal cannot consider deductions where the alleged underpayment falls more than two years before the date of presentation of the claim.

In practical terms what this means is that where an employee makes a claim for a shortfall in his holiday pay, the deduction falls on the date which he was paid the short pay. Hence, that is the date on which the clock starts ticking. If the claim is received by the Tribunal more than 3 months after the date of deduction, then the Tribunal does not have jurisdiction to hear the claim. In a series of deductions, it is the final deduction in the series that starts the clock. If there is a period greater than 3 months within this chain, in other words if it is more than 3 months since the employee has taken holiday, then that breaks the chain and the claim can go no further back in time than the point of the break. If the chain is unbroken, the claim cannot be traced back further than 2 years.

David Robinson-Young 
Dere Street Barristers 
Friday, 14 October 2016

David practises almost exclusively in employment and discrimination matters in which he acts for Claimants and Respondents.  He has advised both large and small employers as well as trade unions providing legal representation. He also provides initial advice and regularly appears in Employment Tribunals nationwide including Scotland and the Employment Appeals Tribunal.

He has provided representation for individual employees in internal disciplinary proceedings. He is practical and approachable, known for his people skills and ability to relate to clients. He has been certified by the Bar Council to accept instructions under the Direct Access to the Bar scheme and will happily offer advice in this respect if the circumstances of the case allow.

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