Case law take-away: British Gas v Lock (holiday pay)

This aims to be a bite-sized summary of the headlines to take away from yesterday’s Employment Appeal Tribunal decision on holiday pay in the case of British Gas v Lock. Aimed at employers rather than legal practitioners. Minimum case detail and legal analysis is intended.

The alarm bell:

Calculating holiday pay for employees and workers whose pay includes commission based on results achieved, as well as basic pay. (The worker in this case was a sales person for British Gas who earned commission based on how many contracts he got customers to sign up to).

The take-away:

Regulation 16 of the Working Time Regulations entitles workers to be paid for their 5.6 weeks’ annual statutory holiday at the rate of “a week’s pay”. The calculation of “a week’s pay” for this purpose is set out in the Employment Rights Act 1996. The EAT in Lock has decided that the relevant sections of the Employment Rights Act can be (and therefore must be) interpreted in such a way that 4 weeks of annual holiday pay for workers who earn commission based on results achieved must include payment to represent the commission they would have earned had they been at work.

This follows on the heels of the previous EAT case of Bear Scotland in which the EAT decided that our domestic legislation could be (and therefore must be) interpreted in such a way that 4 weeks of annual holiday pay for workers who carried out non-guaranteed overtime (i.e. overtime which the employer was not obliged to provide but which, if it was offered, the worker was required to carry out) must include payment to represent the overtime pay they would have earned had they been at work.

These decisions are based on the fact that the European Court had previously decided that, under the Working Time Directive, workers must receive their normal remuneration for periods of holiday. To receive less might deter workers from taking holiday. The commission received by Mr Lock was linked to the work he was required to carry out under his contract of employment and therefore formed part of his normal pay for work done.

In practice:

  1. Employers should check that any workers who receive commission or payment for non-guaranteed overtime on top of their basic pay are receiving the correct amount of holiday pay.
  2. Those workers’ holiday pay should be calculated by reference to their average earnings, including commission payments and/or payments for non-guaranteed overtime.
  3. Although still not entirely clear, it is likely that Tribunals will expect that average to be calculated by reference to the 12 week period prior to the holiday being taken. (If no pay was received during any of those 12 weeks, earlier weeks should be taken into account to make up the 12 week calculation period). However, if that 12 week period does not create an average which is representative of normal pay, it may still be open to challenge on the grounds that a longer reference period ought to have been used. Time will tell how the Tribunals address that issue in practice.
  4. The holiday pay for workers who earn commission and/or receive payment for non-guaranteed overtime will almost certainly vary from holiday period to holiday period.
  5. The requirement to include payments for commission and/or non-guaranteed overtime only applies to a worker’s 4 week holiday entitlement which stems from the European Working Time Directive. It does not apply to the additional 1.6 weeks which workers in this country are entitled to receive under our domestic Working Time Regulations and any contractual holiday entitlement in excess of that (albeit that an employer can obviously choose to apply the higher calculation for all).
  6. It would be good practice for employers to state in the employment contract which holiday is taken first in the holiday year, i.e. the 4 week European entitlement or the 1.6 week domestic entitlement and any other contractual entitlement. There are tactical reasons for doing so.
  7. Overall, the calculation of holiday pay for some employers is likely to become more complicated and result in an increase in existing holiday pay wage bills.

The consequence:
Employers who fail to pay the correct amount of holiday pay risk Tribunal claims for unlawful deduction from wages and breach of regulation 16 of the Working Time Regulations. Workers can claim up to 2 years’ outstanding holiday pay via an unlawful deduction from wages claim, albeit that there may be arguments to be had that parts of the claim are out of time.
If you have concerns or queries regarding the correct calculation of your workers’ holiday pay, please get in touch.
Claire Collinge
Partner, Workwise Legal LLP