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Unpicking Lock: The Current State of Play in Holiday Pay Litigation

Analysis by Benjamin Gray 

Last week the Employment Appeal
Tribunal handed down judgment in the latest round of holiday pay litigation: Lock
v British Gas Trading Ltd
[2016] UKEAT/0189/15. Lock has been one of the key cases
in this developing area of law. The
latest decision appears to be a holding pattern from the EAT and indication
that the appropriate next stage for any challenge lies with the Court of Appeal.

Background: The Holiday Pay Legislation and Litigation

Holiday pay is governed by the Working Time Regulations 1998, which
implement the EU’s Working Time
Directive
. The Regulations
calculated the rate of holiday pay by using the modified versions of the
definitions of a week’s pay in the Employment
Rights Act 1996
. These definitions
caused some employees, such as those with significant commission-based or
overtime payments, to lose out financially, as these would be excluded from the
calculation of their holiday pay.

The first case in this series, Williams
v British Airways
(2011) C-115/10, brought under the equivalent
legislation for the civil aviation sector, went to the European Court of
Justice and then the Supreme Court. The
Courts held that holiday pay had to be calculated in a way that corresponded
with a worker’s ‘
normal remuneration’,
including (among others) all components intrinsically linked to the performance
of the tasks they were required to carry out under their contract of
employment. If this resulted in a
varying rate of pay, holiday pay had to correspond to a sufficiently
representative period. Neither Court was
willing to be definitive about how to calculate this reference period.

Lock, the current case,
was the next in series, also going up to the ECJ ([2014] IRLR 648). The Claimant’s pay package consisted of basic
salary and results-based commission that amounted to approximately 60% of his
income. The ECJ, applying Williams,
held that this commission had to be included in Mr Lock’s holiday pay: it was
linked to the performance of his duties and failure to pay it would deter him
from exercising his rights under the Directive.

Bear Scotland v Fulton [2015]
ICR 221 came next, considering the issue of non-guaranteed overtime –
i.e. overtime that the employee was obliged to work, but the employer was not
obliged to provide. The EAT held that
this too was holiday pay. The key part
of the decision, however, was whether it was possible to read the Working Time Regulations, the domestic
legislation, in a manner that was consistent with the ECJ’s above interpretation
of the Working Time Directive. It was possible to reinterpret the
Regulations to, in effect, disapply the part of the ERA 1996 that prevents the
recovery of overtime. Regulation 16
would now include the following underlined words:

16 -Payment in respect of
periods of leave

 

  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 
and, in the
case of the entitlement under regulation
13, sections 223(3) and 234 do not apply
.

Lock, when it returned to
the Employment Tribunal (Case No:
1900503/2012
) engaged in a similar reinterpretation exercise. This time, the Tribunal added a further
subsection (e) to regulation 16:

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 s.221

The effect of was that one starts
with the normal statutory provisions on calculating holiday pay, but if the
worker receives commission or a similar payment, they are treated as employees
with varying remuneration, requiring an averaging exercise.

The Present Appeal in Lock

Both of the above cases can be
criticised on the grounds that they propose a substantial rewriting of the Regulations. The judgments disapply the clear wording of
the legislation and do so using a broad concept of Parliamentary intent that
can, at the least, be described as controversial.

 

British Gas appealed on 2 key
grounds:

 

 

  1. The
    logic of
    Bear Scotland did not apply to cases of commission; and
  2. Bear Scotland was in any event wrongly decided and should not be
    followed – either because the EAT was bound by the Court of Appeal’s decision
    in
    Bamsey
    v Albon Engineering and Manufacturing plc
    [2004] ICR 1083, or because
    it was not possible to re-read the
    Regulationsin the manner proposed above.

 

 

The Tribunal (Singh J) rejected
these submissions. After concluding thatBear
Scotland
was not distinguishable from the present case on point 1,
he went on to consider whether the EAT should nevertheless refuse to follow it.

 

The EAT summarised the relevant
principles on when it will depart from its earlier decisions, and provided a
useful list of the situations in which it would consider doing so. In Singh J’s view, none of these exceptions
applied. The decision in Bear
Scotland
could not be said to be ‘manifestly
wrong
’, nor was this an exceptional case.
He thought it would be inappropriate to reconsider the merits of the
substantive argument in that case. Such
an approach risked creating further inconsistent decisions at the EAT level and
risked creating (even more) uncertainty for parties. The correct forum for challenging the
decision in Bear Scotland would have to be the Court of Appeal.

Observations and Next Steps

 

The EAT, in restricting its
decision to simply whether it was appropriate to depart from a previous
judgment, showed a clear reluctance to upset Langstaff J’s decision in Bear
Scotland
. This judgment is
likely to remain the settled law of the EAT, and any challenge will have to go,
as Singh J observed, to the Court of Appeal.

 

British Gas have 42 days to lodge
such an appeal. Given the public
importance of this area of law, the need for legal certainty and the potential
problems posed by such a significant re-reading of legislation, it seems likely
that any such appeal would pass the permission stage.

 

One matter the EAT did not
address is that although the Employment Tribunal followed the decision in Bear
Scotland
, it did not reach an identical outcome. The two cases propose different, albeit
consistent, re-readings of the legislation.
By simply electing to say that Bear Scotland remained good law, the
EAT did not explicitly address whether the subsequent decision to add further words to the Regulations was also correct. Nevertheless, the consistency and implicit
endorsement of the ET’s efforts here would suggest that it is safe to treat Lock’s
re-reading as good law for the moment.

 

In the event that there is no
successful appeal, the case will return to the Employment Tribunal to consider
the remainder of the claim including what the correct reference period should
be for calculating any holiday pay. This
question has been a source of particular uncertainty and the outcome of any
decision on this point may itself be appealed.

 

The claim is a lead case for
thousands of similar claims both against British Gas and other employers across
the UK, all of which were stayed pending this decision.

 

This remains a highly uncertain
area of law and an appeal to the Court of Appeal seems likely; if not in this
case, then in subsequent ones. Employers
will continue to have a bumpy ride.

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