The Working Time Directive states that member states must ensure that workers have the right to at least four week’s paid annual leave. However, it does not specify how statutory holiday pay should be calculated. The European Court of Justice has subsequently held that paid annual leave means that workers on holiday should receive their normal remuneration.

The Working Time Directive is implemented into UK law by the Working Time Regulations 1998, which provides workers are entitled to 5.6 week’s annual leave. Workers are entitled to be paid at a rate of a “week’s pay”. A week’s pay depends on if the worker has normal working hours or no normal working hours. If a worker has normal working hours then their week’s pay is calculated with reference to those hours. Where a worker does not have normal working hours their week’s pay will be based on their average weekly remuneration including overtime, bonuses and commissions calculated over 12 week reference period.

In British Gas Trading Limited v Lock Mr Lock was paid basic salary and results-based commission but only basic pay during leave as he was a worker with normal working hours whose remuneration did not vary with the amount of work done for the purpose of the week’s pay rules. A reference was made to the European Court of Justice. An employment tribunal held that results-based commission must be included when calculating holiday pay and that it was possible to read words into the Working Time Regulations. British Gas appealed.

The EAT dismissed the appeal. It is permissible – and indeed necessary – to imply words into the Working Time Regulations to comply with EU law to include results- based commission in the four week’s statutory holiday pay derived from the Working Time Directive. However, it does not provide any more certainty as to the practical applications of the principles. For example, what is an appropriate reference period. In order to comply with current case law the reference period must be a representative normal period i.e. one which reflects normal working. In the case of British Gas Trading Limited v Lock it was suggested to be 12 months. The European Court of Justice did not take this suggestion forward but said that holiday pay must correspond to the worker’s normal remuneration and it is for the national court to work that out by taking an average over a reference period that is considered to be representative.

We understand that British Gas is seeking permission to appeal to the Court of Appeal. So pending a definitive ruling on these issues there remains uncertainty for employers about how to deal with claims for unpaid holiday and how to calculate holiday going forward. However, any claims brought on or after 1 July 2015 are limited to deductions where the relevant date of payment fell within two years before presentation of the claim.

What should be included in holiday pay?