Employers are obliged to provide 20 days’ paid holiday to all full-time workers with a pro-rata entitlement for anyone who works less than full time (Article 7, Working Time Directive (2003/88/EC)) (the Directive) (Article 7). There is no express stipulation under the Directive as to how to calculate the pay for holidays.

The Directive was implemented in the UK through the Working Time Regulations 1998 (SI 1998/1883) (WTR) under which holiday pay is calculated by reference to “a week’s pay” under sections 221 to 224 of the Employment Rights Act 1996 (sections 221 to 224) (regulation 16, WTR). Broadly, this means that, for those with normal working hours, their week’s pay will be their basic pay excluding non-guaranteed overtime, allowances and commission, whereas for those without normal working hours the pay is based on an average of a week’s pay over a 12-week reference period before the holiday (see box “A week’s pay”).

In Bear Scotland Limited v Fulton and another the Employment Appeal Tribunal (EAT) held that non-guaranteed overtime must be included in holiday pay for the purposes of Article 7 and so the EAT inserted additional words into the WTR to bring them into line with the requirements of Article 7 (UKEAT/0047/13, UKEAT/0160/14 and UKEAT/0161/14, see News brief “ Calculating holiday pay: overtime is overdue”).

Mr Lock was an employee of British Gas Trading Limited. He received a basic salary but was also eligible for commission. The commission he earned under the scheme greatly exceeded his basic salary. When he went on holiday in 2011/12, he received his basic pay but no element to reflect the lost opportunity to earn commission. Mr Lock brought a claim for unlawful deductions arguing that his holiday pay should have been calculated so as to include a commission element, which would reflect his normal remuneration.

An employment tribunal stayed the proceedings and referred to the European Court of Justice (ECJ) the question of whether the Directive requires commission to be included in the calculation of the employee’s holiday pay for statutory holiday periods. The ECJ followed British Airways plc v Williams and held that it should (C-155/10; C-539/12).

Following the ECJ’s answer, the employment tribunal upheld Mr Lock’s claim and followed Bear Scotland in holding that it was permissible and necessary to imply words into the WTR for it to comply with Article 7. The effect of that was to amend regulation 16(3) of the WTR to allow employees whose remuneration includes commission or similar payment to have their holiday pay calculated based on an average hourly rate of pay calculated over the 12 weeks before the holiday. This average will then take into account commission earned in the previous 12 weeks. British Gas appealed to the EAT, which upheld the employment tribunal’s decision (UKEAT/0189/15; www.practicallaw.com/5-625-1867). British Gas appealed.

British Gas argued that Bear Scotland had been wrongly decided in that it was not permissible for the courts to amend the WTR to reflect the requirements of Article 7. The UK courts are required to interpret the WTR by applying the so-called conforming interpretation. The principle of conforming interpretation requires national courts to interpret national legislation implementing EU directives in order to give effect to the purpose of the EU directive (Marleasing SA v LA Commercial Internacional de Alimentacion SA C-106/89).

However, British Gas maintained that this principle did not allow the employment tribunal to interpret the WTR in the way it had, as this amounts to a crossover from interpretation to actual amendment of the legislation. Although the court considered that the issue was finely balanced, it concluded that, in these circumstances, it was appropriate to apply a conforming interpretation and read the WTR as the employment tribunal proposed and that to do so was not to go against Parliament’s intentions when it enacted the WTR. Although the court did accept that when Parliament implemented the WTR, it could not have known how the ECJ would subsequently interpret Article 7.

The court also rejected an argument that it was bound by its earlier decision in Bamsey and Others v Albon Engineering and Maufacturing plc ([2004] EWCA Civ 359). In that case, the court had ruled that the Directive did not deal with the actual amount of remuneration to be paid as holiday pay, as that was a matter purely for EU member states. The court in Lock accepted that Bamsey could no longer be good authority on that point given that the ECJ had, since then, clearly ruled that holiday pay must reflect normal remuneration.

In many ways Lock is an unsatisfactory decision. It answers the very specific circumstances of Mr Lock’s claim. Indeed, the court was very clear that it was not the court’s function to do more than to deal with this specific appeal. It does answer the question of the application of the conforming interpretation to the WTR, or at least it does unless and until there is an appeal to the Supreme Court in this, or another, case.

What it does not do is assist employers in applying sections 221 to 224 to the myriad of different circumstances in which commission or bonus payments might be paid to employees. The amendment to the WTR proposed by the employment tribunal in Lock worked for the specific circumstances of Mr Lock’s case. Does it work for all commission schemes or bonus arrangements?

Take the simple example of a substantial bonus payment paid once a year. The Lock amendment to the WTR would capture that if the bonus fell within the 12 weeks before a holiday. It seems doubtful that this is appropriate, since that type of bonus cannot really be seen as part of normal remuneration for holiday pay purposes and in no sense is the employee losing out when he goes on holiday.

It is perhaps not surprising that there is no simple amendment to the WTR that will fit all circumstances since, despite what the court thinks, Parliament cannot have been expected to legislate in 1998 for something that was only made clear by the ECJ some eight years later.