England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM EMPLOYMENT APPEAL TRIBUNAL

		Royal Courts of Justice Strand London, WC2 Wednesday, 27th November 2002

1. LORD JUSTICE PILL: This is an appeal against a decision of the Employment Appeal Tribunal ("EAT") (His Honour Judge Wilkie QC presiding) given on 10th April 2002, reversing the decision of an Employment Tribunal ("ET") held at London south given in extended reasons dated 20th November 2001. The ET had held that the Malley Organisation Ltd (trading as First Business Support) ("the appellants") had not made any unauthorised deductions from the wages of Mr M Evans ("the respondent") and that the respondent was not unfairly dismissed. It was the first of those findings which was in effect reversed by the EAT. There was no appeal to the EAT against the second finding.
2. The relevant claim was clearly put to the ET by the respondent as a claim for holiday pay which, it was argued, had been calculated by the appellants on the wrong basis. The Working Time Regulations 1998 (1998 no 1833) implement Council Directive 93/104/EC and confer on workers the right to a period of paid annual leave. It was also argued that the payment made to the respondent during the period of 11 days immediately before the termination of his contact of employment when he was under suspension was calculated on the same erroneous basis.
3. The ET found, and the finding is not challenged, that the respondent resigned and was not dismissed from his employment. He left to work on the same day for a competitor of the appellants. He had been under suspension on the ground that he was allegedly part of a conspiracy between several members of staff to leave at the same time to work for a competitor.
4. The appellants provide services to businesses in employment law and health and safety. The respondent was employed by them from 9th March 1998 until 24th March 2000 as a sales representative under a written contract of employment. The particulars of the contract provided, so far as is material:

"Hours of Work

Your hours of work will normally be 9am to 5.30pm (Monday to Friday), but you will be required to work additional hours as determined by the needs of the business.

Remuneration

Your salary is currently £10,000 per annum payable monthly in arrears by credit transfer to your Bank and is detailed on payslip, and you are entitled to receive commission payments as detailed in your offer letter..."

[The offer letter is not before the court]

"Holiday pay

Your rate of pay for holidays is your normal basic rate."

5. Commission was much the larger part of the respondent's income under the contract. It was paid at the rate of 25% of the value of the contract to the appellants. The right to commission arose when the client had paid a quarter of the overall fee under his contract with the appellants. Contracts were usually for three years, so that the right to full commission usually arose after nine months.
6. Holiday pay had been paid during the period of employment on the basis of the appellants' view of the 1998 Regulations. The sum paid had been determined by calculating a weekly rate on the basis of the salary of £10,000 a year. Commission falling due during the holiday period had also been paid on the basis stated above.
7. The respondent's contention in his originating application was:

"I contend that holiday pay should be at the full normal rate of pay. Earnings in excess of basic pay (by way of commission paid on sales value) amounted to an average of £1,098 per week since introduction of the WTD. The statutory minimum holiday between this date and the date of termination totalled 4.6 weeks producing a net of underpayment of £5,031.

PAYMENT DURING SUSPENSION

I was suspended for a period of 11 working days leading up to my last day (24th March 2000) and paid at basic rate of pay. I contend that I am due my full average earnings during this period, calculated as an additional £2,416 over basic pay."

8. Before the ET the parties agreed what the relevant issue was. They were both represented, the respondent by an employment law consultant and the appellants by counsel. The issue was stated as follows:

"The Applicant received basic pay plus commission. He will say that during periods of holiday leave and during his suspension from work he should have been paid his average salary and not his basic salary."

9. The nature of the claim appears to me to be clear. With respect both to holiday pay during the period of employment and pay during the short period of suspension, the calculation was made on the wrong basis. A statutory right to holiday pay, though not mentioned, was clearly in contemplation. A procedural difficulty has arisen in that the ET, in their finding and in their extended reasons, have introduced section 13 of the Employment Rights Act 1996 ("the 1996 Act") dealing with unauthorised deductions from wages.
10. Having rejected the claim for unfair dismissal, the ET stated:

"23. We considered the Applicant's complaint that holiday pay should be paid at a rate equivalent to his average earnings. We found that the Applicant is an employee who is remunerated for employment in normal working hours; and whose remuneration does not vary with the amount of work done in the period, within the meaning of section 221(2) Employment Rights Act 1996. The Tribunal has considered the contract of employment. It clearly states that holiday pay is payable at the normal basic rate of pay. This has been accepted by the Applicant throughout the duration of his employment. The Tribunal was satisfied that the Applicant received all sums properly payable within the meaning of section 13 Employment Rights Act 1996. We reject the Applicant's submission that the Working Time Regulations operate so as to enhance the calculation of his holiday pay by commission earned."

11. The reference to section 13 was in my judgment unfortunate and unnecessary. In what was plainly a claim that holiday pay had been calculated on the wrong basis, the respondent's right arose by reason of section 221 of the 1996 Act and Regulations 13 and 16 of the 1998 Regulations.
12. Regulation 13 of the 1998 Regulations created an entitlement to annual leave. Regulation 16 provides, in so far as is material:

"(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)."

The modifications set out in paragraph (3) are not material in this case.

13. Section 221 provides, in so far as is material:

"(1) This section and sections 222 and 223 apply where there are normal working hours for the employee when employed under the contract of employment in force on the calculation date.

(2) Subject to section 222, if the employee's remuneration for employment in normal working hours (whether by the hour or week or other period) does not vary with the amount of work done in the period, the amount of a week's pay is the amount which is payable by the employer under the contract of employment in force on the calculation date if the employee works throughout his normal working hours in a week.

(3) Subject to section 222, if the employee's remuneration for employment in normal working hours (whether by the hour or week or other period) does vary with the amount of work done in the period, the amount of a week's pay is the amount of remuneration for the number of normal working hours in a week calculated at the average hourly rate of remuneration payable by the employer to the employee in respect of the period of twelve weeks ending-

(a) where the calculation date is the last day of a week, with that week, and

(b) otherwise, with the last complete week before the calculation date.

(4) In this section references to remuneration varying with the amount of work done includes remuneration which may include any commission or similar payment which varies in amount."

14. It is not suggested that the other sections mentioned in section 221 affect the issue of construction to be decided in this appeal.
15. Regulation 35 of the 1998 Regulations provides that any provision in an agreement is void in so far as it purports to exclude or limit the operation of any provision of the regulations, save in so far as the Regulations provide for an agreement to that effect. I see no basis on which the operation of Regulations 13 and 16 can be excluded in this case. Moreover, the reference by the ET to section 13 and to "unauthorised deductions" does not affect the validity of their reasoning on section 221. Their reasoning in paragraph 23 is clear. It is not now suggested that their reference to section 13 taints their decision, provided of course that their construction of section 221 was correct. It is upon the meaning of that section, in my judgment, that the issue on holiday pay in this appeal turns.
16. Before considering that issue, I refer to Regulation 14 of the 1998 Regulations. Issues upon it have been raised on behalf of the appellants. The Regulation provides for compensation on a once-for-all basis for a worker whose employment is terminated during the course of his leave year and had not taken his full leave entitlement during that year. Submissions having been made on the Regulation by the parties and it is sought on behalf of the respondent to argue that there was a potential claim under the Regulation which the ET did not consider.
17. In my judgment, the respondent cannot take advantage of Regulation 14 at this stage. There is nothing in the extended claim form, in the agreed issue or in the extended reasons of the ET to suggest that a claim under Regulation 14 was made to the ET. It is a claim distinct from that under Regulations 13 and 16. In the absence of a claim, I see no justification for treating Regulation 14 as material on the hearing of this appeal.
18. Mr Stuart, on behalf of the appellants, also argues that the claim under Regulations 13 and 16 is defeated by limitation, there having been no complaint to the ET before the end of the period of three months beginning with the date on which any right to enhanced holiday pay would have arisen (Regulation 30 of the 1998 Regulations). Mr Cohen, for the respondent, submits that failure to take the point earlier has deprived the respondent of the opportunity to persuade the ET that this was a case in which time should have been extended under Regulation 30(2)(b). I propose to decide this appeal on its merits and without further reference to that point.
19. The issue is whether the respondent's contract comes within section 221(2) or 221(3) of the 1996 Act. The ET held that it came within section 221(2). It is common ground that there were normal working hours for the employee within the meaning of section 222(1). They were specified in the contract. The ET held that remuneration did not vary with the amount of work done in the period, within the meaning of subsection (2). The EAT (paragraph 12) held that "The amount of work done in the period of normal working hours did not vary in the sense that payment was not based on the amount of work done. Rather payment of commission was based on the outcome of that work, whether for fortuitous or due to good performance." So far they agreed with the ET. However, having expressed that view, the EAT concluded that section 221(4) had the effect of overriding the normal meaning of subsection (3) so that:

"... somebody who receives payment by way of commission, which is not payment by reference to the amount of work done but payment by reference to the varying result of work done, is provided for by subsection (3) rather than subsection (2)."

20. Mr Cohen seeks to uphold the conclusion of the EAT. He submits that reading subsections (3) and (4) together their conclusion was correct. Section 224(1) is declaratory. It makes clear that payment of commission brings a contract such as the present within subsection (3).
21. Mr Cohen also submits that read alone subsection (3) covers the respondent's contract. He accepts that work is being done by the employee when he is attempting to obtain a contract with a client for his employer. He does not suggest that only work which is successful in leading to a contract can be work. He also accepts that historically subsection (3) was intended to cover what is commonly known as piecework, payment, for example, for the number of articles produced by an employee at a factory. Mr Cohen submits that in the case of piecework the concept of success arises in that each article produced must be a successful (that is a marketable) article. In the present case there is a correlation between the amount of work and the degree of success achieved, it is submitted. Payment of commission requires success and the work done and the degree of success are interrelated, so that the remuneration does vary with the amount of work done.
22. The wording of section 221(4) is curious, in that the subject of the word "includes" in the first part of the subsection is "references" whereas in the second part the subject is "remuneration". Mr Stuart has referred to the predecessors of the 1996 Act beginning with the Contracts of Employment Act 1963. The equivalent section in the 1963 Act (Schedule 2, paragraph 2(7)) provided that:

"References in this paragraph to remuneration varying with the amount of work done include references to remuneration which may include any commission or similar payment which varies in amount."

That wording was maintained in subsequent Acts. It is not clear why the second appearance of the word "references" was eliminated in the current statute and no satisfactory explanation has emerged. Neither party submit that the change involved a changed intention as to the meaning of the subsection or that, for present purposes, it does alter the meaning.

23. I am unable to accept Mr Cohen's submission. The distinction between subsection (2) of section 221 and subsection (3) turns on whether or not the employee's remuneration does or does not vary with the amount of work done in the normal working hours. I am unable to conclude that it does. Work is done and the amount of work does not depend on the number of contracts obtained. Time spent attempting unsuccessfully to persuade a client to sign a contract is as much work as a successful encounter with the client. I am not able to read the expression "amount of work done" as meaning that amount of work and that part of the work which achieves a contract. The amount of work resulting in a contract may vary, but the result achieved by the work is a different concept from the act of working.
24. In my judgment subsection (4) does not bear upon the issue whether a contract falls within subsection (2) or (3). That must first be determined in accordance with the test plainly stated in the section and already identified. Subsection (4) is not relevant to that decision. What subsection (4) and its predecessors achieve is to make clear that once the categorisation is made, the relevant remuneration may include commission or similar payments such as a bonus. It is not otiose because it is easy to envisage situations in which remuneration does vary with the amount of work done, but where remuneration includes commission or a bonus, for example, once a specified level of productivity has been achieved. The reference to commission in subsection (4) does not require or permit all contracts in which commission is a part of the remuneration to be placed within subsection (3).
25. I would decide the issue on those grounds and not on the alleged anomalies in this case, to which Mr Stuart draws attention, if a different view is taken and the averaging method in subsection (3) applies.
26. What the use of the averaging method does tend to confirm, however, is the fit between subsection (3) and pieceworking in the traditional sense. Where there are marked variations in the amount of work done as between one work and another fairness can be achieved by calculating the amount of holiday pay by reference to an average. That objective is a fair but limited one. Its inclusion in the statute does not require that contracts such as the present should be forced into the subsection (3) category.
27. The EAT took a different view of section 221. While it is not entirely clear from their order, it appears that the EAT have given a direction that the ET calculate holiday pay by reference to commission received during the 12 weeks immediately preceding the termination of the contract. The commission paid during that period will have been earned, in the main, six to nine months earlier and does not indicate the current level of achievement by way of contracts. That demonstrates the artificiality of applying the averaging procedure in subsection (3) to the current situation, and goes against a statutory construction which would place all contracts where commission is a part of remuneration in subsection (3). Moreover, if the EAT have required an exercise to be conducted in relation to the 12 weeks prior to termination, they have created a claim which was not in fact made, the claim having been related to earlier holidays.
28. As to pay during the period of suspension, the EAT concluded:

"24. We turn now to consider the Applicant's payment due in suspension. We found no evidence to support the Applicant's complaint that he should receive more than the basic rate of pay during the period of his suspension, for example, we heard no evidence of any custom or practice in the workplace that might support his contention. The Tribunal finds the Applicant's complaint that he was entitled to average earnings during the period of suspension, which should include an amount equivalent to commission payments, unsupported by the evidence. This complaint also fails."

29. The EAT permitted a late amendment to the notice of appeal by the respondent to include a claim that pay under suspension had been calculated on the wrong basis. They remitted this issue to the ET "to hear evidence of the true meaning, either expressed or implied, of 'suspension with pay'". They held that the contract was silent as to what the word "pay" means in relation to the disciplinary procedure which provides for suspension on pay. They state that the ET had not addressed the question at all.
30. I would not reverse the EAT's decision to grant permission to amend, but I do not agree with their decision to remit this issue to the ET. The ET reached a conclusion which they were entitled to reach on the evidence. They were entitled to conclude that there was no evidence of custom, practice or anything else which required them to decide that the respondent was entitled to average earnings during the period of suspension. Faced with a contract of employment which stated a salary, they were entitled to treat that, in the absence of further evidence, as the sum payable.
31. Mr Cohen does refer to the mention under the heading "Remuneration" in the contract of the entitlement to "receive commission payments as detailed in your offer letter". The offer letter has, apparently, played no part in the proceedings and counsel have not seen it. That reference does not, in my judgment, disentitle the ET from reaching the conclusion they did. There is a public interest in finality, as well as the interest of the parties themselves, and the effect of the remission would be to permit the respondent to produce evidence which could have been produced before the ET and should have been produced if reliance was to be placed on it. In the absence of other evidence, the ET were entitled to treat the salary as the sum upon which pay during suspension should be calculated. The claim having been put as it was, it is not necessary to consider whether the justification for the suspension was a relevant factor.
32. I add only that, with respect to both claims, the question of loss of opportunity to earn commission as a possible basis for the claims has not arisen upon the claim in fact made. I propose to make no comment on it.
33. For the reasons I have given, I would allow the appeal and reinstate the order of the ET.
34. LORD JUSTICE JUDGE: I agree. Under the contracts of employment with which we are concerned, Mr Evans was paid a basic salary together with commission if and when he was successful in obtaining a contract for his employers. Although the entitlement to commission was earned with the achievement of a successful sale, it was not payable until the new client had paid 25 per cent of the contractual sum due to the employers. Usually that occurred nine months after the contract had been achieved. Commission was not earned while Mr Evans was on holiday, but he was entitled to be paid all the commission which had been earned before he did go on holiday and which had already become due to him under his contract of employment. It is not suggested that any of these sums were withheld from him, nor that his employers failed to pay his holiday pay calculated on the basis of his basic salary. What is in issue is whether his holiday pay should have been based on his average earnings, taking account of the commission which was due to him.
35. Mr Evans was of course expected to work conscientiously, and if he did it was hoped, both by him and his employers, that he would be successful in obtaining contracts. For these efforts he was paid his basic salary, which was due to him whether he succeeded in obtaining any contracts or none. If by working conscientiously he also achieved what it was hoped that he would achieve, he would then, but not otherwise, have earned commission in addition to his salary. Therefore the payment of commission did not depend on the length of his working week, and his remuneration for his employment was linked, not with the amount of work which he did, but with its success. Naturally it was hoped, indeed anticipated, that harder work and more skilful salesmanship would increase the number of contracts obtained by Mr Evans and so increase his resulting commission. But taken on their own, admirable though they are, hard work and skill which produced no contracts entitled him to no more than his basic salary.
36. For the purposes of section 221 of the 1996 Act Mr Evans' remuneration did not vary with the amount of work he did during his working week. Any commission due to him was payable by virtue of earlier success, usually many months previously. It was unconnected with the amount of work he did during the 12-week period before his employment came to an end, which forms the basis of any calculation made under section 221(3) and on which the decision of the Employment Appeal Tribunal was founded.
37. Unlike the Employment Appeal Tribunal, I do not believe that section 221(4) overrides section 221(3) or, as seems to be implicit in its decision and was supported in argument by Mr Cohen, that cases in which commission forms part of a remuneration package must automatically be treated as falling within section 221(3). Rather, section 221(4) amplifies section 221 and, where remuneration does in fact vary with the amount of work done, enables commission and bonuses and similar payments to be included in the calculation of an employee's week's pay.
38. In my judgment, however, section 221(4) has no impact on the present case, and I agree with the view of the Employment Tribunal that the case falls squarely within the provisions of section 221(2).
39. For these reasons, as well as those expressed by Lord Justice Pill, I agree that this appeal should be allowed. By way of emphasis I should record that I have nothing to add to his observations on the suspension issue, with which I also entirely agree.
40. LADY JUSTICE HALE: I agree that the appeal should be allowed on both the holiday pay and pay during suspension issues.
41. The issue relating to holiday pay is quite simply whether Mr Evans' remuneration for work done during normal working hours did or did not "vary with the amount of work done in the period", for the purpose of section 221 of the Employment Rights Act 1996. If it did, his holiday pay is calculated by reference to the average of what was payable to him over the past 12 weeks. If it did not, it is calculated by reference to his basic remuneration only.
42. There was no dispute that his remuneration did vary month by month under his contract of employment. It expressly consisted of both his basic salary of £10,000 a year and commission. Commission was 25% of the fee received from the client. The client usually entered into a three-year contract with the employers and paid for this in 36 monthly instalments. The employers did not pay their salesmen commission until they had actually received 25% of the fees, normally therefore nine months after the client had begun to pay for their services.
43. There are several good reasons to conclude that although this remuneration varied it did not vary "with the amount of work done":

(i) "Work done" would ordinarily mean tasks undertaken, such as researching potential clients, making telephone calls, writing letters, meeting potential clients: it would not mean "success achieved". Mr Cohen quite rightly says that work done leads to success achieved: but that does not mean that the words have the same meaning.

(ii) The ordinary meaning of the "amount" of work done would refer to its quantity and not to its quality or its results.

(iii) The variation in remuneration in this case was not "with" the amount of work done in the period but with success achieved as a result of work done in a completely different period, usually nine months earlier.

(iv) The concept of averaging over 12 weeks is difficult to fit with the concept of success fees relating to a completely different period.

44. Hence I conclude that the Employment Appeal Tribunal was quite right to say, in paragraph 12 of its judgment:

"The amount of work done in the period of normal working hours did not vary in the sense that payment was not based on the amount of work done. Rather payment of commission was based on the outcome of that work, whether fortuitous or due to good performance. Therefore, as these three [subsections] stand, one would have thought that the natural meaning was that commission would not be included as part of payment, so that the averaging out provisions of subsection (3) would not apply."

45. There is nothing in section 221(4) to change that. This is clearly defining remuneration for the purpose of what is included as remuneration but that still has to be within the overall criterion of varying with the amount of work done.
46. So for those reasons, I would allow the appeal relating to the holiday pay.
47. But had I reached a different conclusion I would not have excluded a possible claim under Regulation 14. The issue debated before the Employment Tribunal was the proper rate at which payment for holidays should be made. If the rate had been as claimed by Mr Evans there would then have been arithmetic done as to what had been paid for the holidays taken for the purposes of Regulations 13 and 16. There would also have been a calculation done as to whether he was entitled to any holiday pay in lieu of the proportion of holidays not yet taken during the proportion of the holiday year which had elapsed when his employment ended for the purposes of Regulation 14. It is the case that one can contract out of the latter: see Regulation 14(3)(a) and 35(1)(a). But this is only if it has been clearly done for the purposes of this Regulation, which was not the case here.
48. Tribunals were set up specifically so that lawyers would not be needed. The law they have to apply is complicated and becoming more and more so. But their procedures are designed to be used by non-lawyers. That philosophy has recently been reinforced by the report of the group chaired by Sir Andrew Leggatt entitled "Tribunals for Users" published in 2001. All the recommendations in that report, including those relating to Employment Tribunals, were designed to strengthen their user-friendliness to people without representation rather than the other way about. The courts which hear appears on points of law from such tribunals have obviously to play their part in recognising that philosophy. We must recognise that we should try to avoid technicalities of pleadings and other concepts which are familiar in ordinary litigation. The basic requirement is that the procedure has been fair overall and no prejudice has been done to either party.
49. But that is a very different thing from saying that applicants should have two bites at the cherry. The whole idea is that you put your case before the Employment Tribunal. The Employment Tribunal may have to work very hard to discern what the true legal and factual issues are. The Tribunal is expected to know the law and to understand the employment background. So it can be expected to take a much more active line in discovering the true nature of the dispute and the applicable law than a court might do. The Employment Tribunal also has to decide the relevant facts.
50. An appeal lies to the Employment Appeal Tribunal only on a point of law. It is not for the Employment Appeal Tribunal to discover a wholly new case and send it back so that the applicant can have another chance. It is not always easy to determine which side of the line a particular appeal falls. But the issue of pay during suspension in my view here fell on the wrong side of the line. The claim for more than the basic rate of salary could only depend upon an implied term. Mr Evans may well have had the belief that he was entitled to a particular rate of pay during that period, but there has be more than that in order to imply a term. There has to be something to suggest to an objective bystander that both parties if asked whether there was such a term would say, "Yes of course there was". That is one way of putting the test for implying a term. In this particular case it would have been very difficult to do that. There are all sorts of practical reasons, which we have not rehearsed but Mr Stuart has put before us, for not applying an average pay concept to periods when Mr Evans was not at work. There is a much stronger case for suggesting that there might be some recompense for the loss of an opportunity to earn commission during periods when somebody was not at work. But that case has never been put and has never been explored.
51. So for those reasons, as well as the reasons given by Lord Justice Pill in relation to this issue, I would also allow the appeal.
(Discussion as to costs)
52. LORD JUSTICE PILL: The appellants will have, to this extent, the costs of the appeal. They will have 90% of the costs. Mr Cohen has made submissions that parts of the hearing and the costs involved have been by reason of the appellants taking points on which they lost. We do not see merit in that submission, having regard to the substance of the decision of the EAT. It appears to us that the appellants had to approach all these issues because of the approach of the EAT, and indeed the uncertainties as to what that approach was. Where we propose to make some deduction, however, is on the pay during suspension issue. The only point taken in the notice of appeal was the procedural one that an amendment should not have been allowed by the EAT. On that issue the appellants have lost. They have succeeded on the suspension pay issue, by reason of the point taken by the court which was not taken by the appellants either in the skeleton argument or at the commencement of the hearing yesterday.
53. However, that issue has taken a comparatively limited amount of time and, moreover, the court considered it a duty in the circumstances of this case to take the point and accordingly the deduction we make is a very modest one.
54. The appellants will have 90% of their costs of the appeal. We do not make any order for costs below.

ORDER: Appeal allowed; the respondent to pay 90% of the appellants' costs.

(Order not part of approved judgment) ______________________________