Holiday pay: what are the implications of the Supreme Court's refusal of permission to appeal in Lock v British Gas Trading Ltd?

In October 2016, the Court of Appeal decided that the Working Time Regulations 1998 could be interpreted to include results-based commission payments in holiday pay.  The Court of Appeal indicated that it had "wavered" in reaching its decision.  It was, therefore, widely expected that a further appeal would be heard by the Supreme Court.  However, on 28 February 2017 the Supreme Court refused British Gas' application for permission to appeal.  What does this mean for the calculation of holiday pay?

What does the Supreme Court's decision mean?

The Supreme Court's rejection of British Gas' application to appeal means that the Court of Appeal's decision stands: the Working Time Regulations 1998 (WTR) can interpreted to include results-based commission payments in holiday pay. You can read our detailed report on the Court of Appeal's decision here. Although the Court of Appeal's decision could be overturned by the Supreme Court in another case in future, we are not aware of any cases on this point before the Tribunals and Courts at present.

The consequence is that sums in respect of results-based commission may have to be included in the calculation of holiday pay for the first 4 weeks of holiday under the WTR. Such payments will only need to be included where it can be said they represent "normal pay" – this means that they are intrinsically linked to the worker's contractual duties and are paid on a regular basis.

However, even where this threshold is met, there is no obligation to include such payments in the extra 1.6 weeks' UK holiday not derived from the Working Time Directive (WTD), although some employers may elect to do so for consistency and/or administrative reasons.

Does this affect the question of whether overtime payments should be included in holiday pay?

This development also means that the EAT's decision in case of Bear Scotland concerning the inclusion of non-guaranteed compulsory overtime in holiday pay also stands. Had the outcome of Lock been that the WTR could not be interpreted to conform to the WTD, then this would have conflicted with the decision in Bear Scotland and re-opened the issue of whether such overtime payments should be included in holiday pay.

It is worth remembering that the position regarding genuinely voluntary overtime is not yet settled. Here, the key question is whether such payments can ever be considered to be "normal pay" given that they are special payments for work undertaken voluntarily. There are two first-instance Employment Tribunal decisions (Neal v Freightliner; Brettle v Dudley Metropolitan Borough Council) and a Northern Irish Court of Appeal decision (Patterson v Castlereagh Borough Council) which suggest that voluntary overtime payments should be included. However, none of these decisions are binding and another Tribunal could take a different view.

Should employers adjust holiday pay now?

The Lock case will now return to the Employment Tribunal for a further hearing to decide what compensation should be paid to Mr. Lock. It is hoped that the Tribunal will offer some general guidance on the mechanics of including results-based commission payments in holiday pay. In the meantime, what should employers do?

Many employers have refrained from adjusting the calculation of holiday pay whilst the interpretation issue was under consideration in Lock. Although this latest development means the principle is now settled, two important practical questions remain unanswered:

• What is the correct reference period to be used when including results-based commission payments in holiday pay? In Lock the parties agreed that a 12-week reference period should be used. However, this may not be appropriate in all cases. Indeed, when this case was before the European Courts, the Advocate General suggested that a 12-month reference period might be appropriate. However, the ECJ did not go on to offer any guidance on this issue.

• When will a payment be considered sufficiently regular to warrant inclusion in holiday pay? Case law has confirmed that such payments should only be included in holiday pay where they have been paid over a sufficient period of time to justify being viewed as "normal pay". Therefore, regular payments will be caught (e.g. weekly or monthly payments or other regular intervals). What is not yet clear is how irregular or ad hoc a payment must be for it to fall out of scope. For example, would an annual commission payment be considered "normal pay"?

Affected employers may feel these uncertainties justify a continuation of a "wait and see" approach. However, where an employer decides to take this approach it should make provision to cover the cost of adjustments in future.

Alternatively, an employer could decide to proceed with making adjustments notwithstanding these uncertainties. Where an employer decides to take this approach, they will need to make decisions on: (i) what the appropriate reference period is in the context of their business and reward structure; and (ii) what payments are considered to be sufficiently regular to amount to "normal pay".

Could Brexit change things?

The future relationship between Britain and the EU will affect the extent to which we can adjust EU-derived law, such as the WTR. If Britain were to remain within, or have a high degree of access to, the Single Market then the scope for change is likely to be very limited. This would mean that the WTR would probably stay as it is and require the inclusion of components of pay such as results-based commission and non-guaranteed compulsory overtime.

On the other hand, if Britain is wholly outside, or has very limited access to, the Single Market then the scope for change to EU-derived law would be greater. In such circumstances, it is possible that the Government would adjust the WTR to provide that holiday pay should be basic pay only and does not require the payment of additional components of pay.

However, the Government's Brexit White Paper suggests that the Government does not intend to pare back workers' rights after Brexit, whatever the future relationship with the EU. Nevertheless, employers would be wise to preserve a degree of flexibility in how they calculate holiday pay. For example, holiday pay policies could provide that the employer reserves the right to adjust the calculation of holiday pay in accordance with applicable law and that this may include excluding certain components of pay.