20th Mar 2017

Latest on Holiday Pay: Supreme Court ends British Gas holiday pay challenge

In a long running dispute regarding the payment of commission during holiday, the UK’s largest energy and home services provider, British Gas has been refused leave to appeal by the Supreme Court.

Back in October 2016, the Court of Appeal in Lock v British Gas Trading Limited, had decided that holiday pay must include compensation for any results based commission that would ordinarily be earned by a worker. 

British Gas then sought to appeal this decision to the Supreme Court, which has now been refused – leaving several holiday pay issues and questions unanswered.  

Background to the case

Mr Lock, employed as a sales consultant with British Gas, claimed in an employment tribunal that he was owed money on the basis that his holiday pay did not reflect what he would have earned from his results based commission.

The case was referred to the European Court of Justice (ECJ) to clarify whether or not it was a breach of the European Working Time Directive (WTD) for the Working Time Regulations 1998 (WTR) to limit the calculation of a week’s pay for annual leave to basic pay and exclude commission.

The ECJ held that holiday pay under the WTD cannot be calculated based on basic salary alone and, where a worker’s remuneration includes commission determined on sales achieved, that commission must also be included. This was based on the reasoning that if commission is not taken into account, the worker will be placed at a financial disadvantage when taking annual leave – no commission will be generated during their holiday period.  As a result, the worker may be deterred from taking annual leave, which would be contrary to the WTD.  

The employment tribunal agreed with the ECJ and held that it was necessary to add words to the WTR to give effect to the WTD and EU law, so that commission is included in holiday pay. 

The employment appeal tribunal and Court of Appeal subsequently agreed and upheld the tribunal’s decision.

What does this mean for employers?

The Supreme Court’s refusal to hear an appeal by British Gas effectively brings their holiday pay challenge to an end. This means that employers must take into account results based commission when calculating holiday pay for the first four weeks (but not the extra 1.6 weeks) of statutory holiday under the WTR. 

Whilst this decision was to a large extent expected, there are a number of holiday pay issues and questions that remain unanswered:

  • The Lock decision is only about results based commission.  The Court of Appeal refused to consider whether other types of remuneration, such as annual bonuses, should be included in the calculation of holiday pay.  
  • In reaching its’ decision, the Court of Appeal gave no guidance on the appropriate reference period that an employer should use when working out how much commission to take into account in holiday pay calculations.  The usual reference period is 12 weeks, but this may well vary depending on the type of remuneration in question.
  • How holiday pay is to be calculated in practice, we must wait and see.  Assuming British Gas does not settle beforehand, this case will now go back to the employment tribunal for it to calculate how much holiday pay Mr lock should receive.  This will hopefully provide some much-needed guidance to employers on how exactly holiday pay should be calculated when employees receive this type of commission. 
Will Brexit provide the answer?

The current trend of cases is certainly in favour of an inclusive approach to holiday pay, although it will be interesting to see how the landscape will look post Brexit.  With a hard Brexit on the table, commentators have questioned what impact this could have on the WTR and the concept that holiday pay should be based on all aspects of remuneration rather than basic pay. 

The Prime Minister, Theresa May, has however made it clear on several occasions that under her government there will be no erosion of workers’ rights.  Indeed, Brexit may provide the impetus for the UK’s holiday pay rules in the WTR to be clarified by legislation once and for all. 

What now?

It’s clear that holiday pay remains a live issue and the answer we want with regards to the exact calculation of holiday pay and what needs to be included, may well still be some way off. 

But for now, the message stays the same.  Employers should ensure that they continue to identify any areas of risk in their existing holiday pay calculations under the WTR (especially in view of this final Lock decision and other holiday pay developments) and plan accordingly when making changes to employees’ holiday pay.    


Mike Patterson is an industry ranked Employment and HR Law specialist at Berwins Solicitors of Harrogate and Leeds.

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