United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	Mr John Hand (One of Her Majesty's Counsel) and Mr Damian Brown of Counsel Instructed by: Messrs Steeles (Law) LLP Solicitors 3 The Norwich Business Park Whiting Road NORWICH NR4 6DJ
For the Respondent	Mr Andrew Hogarth (One of Her Majesty's Counsel) Instructed by: Messrs O H Parsons & Partners 3rd Floor Sovereign House 212-224 Shaftesbury Avenue LONDON WC2H 8PR

SUMMARY

Calculation of holiday pay in circumstances where the employees were entitled to a fixed and variable bonus. Did the pay vary with the work done? The Employment Tribunal held that it did and that both pursuant to contract and under the Working Time Regulations 1998 the holiday pay should be determined by averaging the pay over the twelve weeks preceding the holiday. EAT agreed. Consideration of the Court of Appeal decision in Evans v The Malley Organisation Ltd (trading as First Business Support) [2003] ICR 432


 


THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)

INTRODUCTION:

1. This case is about the holiday pay which should have been paid to some 96 Employees, who are the Respondents to this appeal. Their pay had been calculated without giving any credit to two types of bonus which they received. One was a fixed bonus, and the other a variable one.
2. They contended that they were entitled, both under their contracts and by virtue of the Working Time Regulations, to have these bonuses considered as part of their pay for the purposes of determining their holiday pay.
3. They allege that the failure to pay in full the contractual right amount amounted to an unlawful deduction of wages under Section 23 of the Employment Rights Act, and that the failure to make the requisite payments under the Working Time Regulations 1998 was an independent wrong under those Regulations.
4. The Employment Tribunal found in favour of the Employees. The Appellants now contend that the Tribunal erred in law in its conclusions. They submit that the holiday pay had been properly calculated, and that neither the contractual terms nor the provisions in the Working Time Regulations required either of the bonus payments to be taken into consideration.
5. The introduction of the bonuses dates back to 1998. The 96 Claimants were originally employed in the Utilities Section of May Gurney. They were assigned to work on the Utilities Maintenance Contract which May Gurney had entered into with Anglia Water Services. The Agreement provided for the outsourcing of the AWS Contract for a period of five years. It was entered into originally on 22^nd May 2000, and there was a subsequent Variation on 26^th May 2001.
6. The reason why there are two appellants is this. The First Appellant, May Gurney Ltd, originally employed all these workers who were allocated to work on the Anglia contract, but their contracts were transferred to the Second Appellants with effect from 1^st April 2005 when this particular business formerly being carried on by May Gurney pursuant was terminated and the Second Appellants won the contract on the re-tender. All but 14 of the 96 Employees were transferred in this way. There is no conflict between the positions of the two Appellants, and Mr Hand QC represents both of them.

The Background

7. The terms and conditions of these Claimants were determined by certain individual contractual terms, but also a Collective Agreement known as the Working Rule Agreement (WRA). This is an Agreement issued from time to time by the Construction Industry Joint Council. The Agreements have been varied at various times.
8. The following Working Rules are material: Working Rule 1 lays down the entitlement to basic pay. Working Rule 3 sets out the normal working hours as 39 per week.
9. Working Rules 18 sets out the operative's entitlement to 21 days' paid annual holiday, plus 8 public days.
10. Working Rule 18.4, headed 'Payment of Annual Holiday' is then as follows:-

"18.4 Payment for annual holiday.

Payment for annual holiday which shall be made on the last pay

day preceding the commencement of each holiday period shall

be made at either:

18.4.1 Where the operatives pay does not vary with the amount

of work done.

A week's pay is simply the normal weekly wage for the

contractual weekly hours as defined by the contract of

employment.

18.4.2 Where the operatives pay varies with the amount

of work done.

Where earnings vary because of piece work or productivity

bonus arrangements, then a week's pay is arrived at by

calculating the earnings during the normal working week as

defined by the contract of employment, averaged over the

12 complete weeks worked immediately prior to the

holiday week."

11. Until 1998 the Claimants were self-employed, but from that time they were placed on the books as Employees and taxed under Schedule E. This involved a loss of pay and therefore the Company introduced certain bonuses. One of these was a fixed bonus which was described by the Employers as an attendance allowance. It was paid provided the worker turned up for his normal work. The sum was £10.00 per day for gangers and £8.00 for mates. The Tribunal found that if a full week's work was done then it would always be paid.
12. In addition to that fixed bonus, there was a variable bonus. This was determined differently, dependent upon the particular Section in which an Employee worked. There were two Sections, known as Mainline and District, and there were separate performance bonus schemes, as they were termed, for each Section.
13. The District Section had a particular formula which was assessed as follows. The Employees worked in gangs, and each gang had to earn a certain amount in order to cover their running costs. Thereafter, they received a bonus on any amount made over and above those costs. The bonus was fixed at 3%, at least for most of the time. There had been a variation of the arrangement at one point, but after objections from the workforce they went back to the old scheme.
14. In the Mainline Section the bonus was much more ad hoc and discretionary. It depended very much more on the attitude of the foreman or line manager. Sometimes an incentive bonus would be introduced in order to encourage the speedy and efficient performance of a particular task. An example given by the Tribunal was where a number of houses were to be connected to a water system. Jobs would be priced, and greater profits would of course be achieved by a more efficient and speedy performance of duties.
15. The Tribunal noted that the Respondents conceded that the purpose of these bonuses was to remedy the shortfall in earnings which occurred when the workers were transferred from Schedule E to Schedule D in 1998. The Tribunal observed that they thought this was a way of securing that shortfall in a manner which was consistent with – in the sense that it did not contravene - the industry agreements.
16. Before the Employment Tribunal it was contended that there was no contractual right to either of these bonuses, but the Tribunal found that there was. There has been no appeal against that finding. The only issue, therefore, is how the bonuses should be classified.

The Relevant Law

Employment Rights Act 1996

17. The claim is put in two ways: first, as an unlawful deduction under the Employment Rights Act 1996 (ERA); and second, as a failure to honour the terms of the Working Time Regulations (WTR) relating to holiday pay. The Tribunal did not have jurisdiction to hear a simple contractual claim because the workers were still in employment.
18. Section 13 of the Employment Rights Act establishes the right of a worker not to suffer any unauthorised deduction. Subsection (1) is as follows:

(1) An employer shall not make a deduction from wages of a worker

employed by him unless –

(a) the deduction is required or authorised to be made by virtue of

a statutory provision or a relevant provision of the worker's

contract, or

(b) the worker has previously signified in writing his agreement or

consent to the making of the deduction.

19. Subsection (3) makes it plain that the non-payment of wages due will be treated as a deduction:

Where the total amount of wages paid on any occasion by an

employer to a worker employed by him is less than the total

amount of the wages properly payable by him to the worker

on that occasion (after deductions), the amount of the

deficiency shall be treated for the purposes of this Part as a

deduction made by the employer from the worker's wages on

that occasion.

Section 27(1)(a) confirms that the concept of remuneration includes holiday pay.

20. Section 23 of the Employment Rights Act then provides that the worker may present a complaint to the Tribunal that a deduction from wages has been made. By Subsection (2) it is provided that this must be before the end of the period of three months, beginning with the date when the wages from which the deduction was made was paid. Subsection (3) provides an exception: where there is a series of deductions or payments, then time does not run until the last payment in the series has been received.

Working Time Regulations

21. The other way in which the case is put is pursuant to the Working Time Regulations. Regulation 13.1 provides that a worker is entitled to four weeks' annual leave in each leave year.
22. Regulation 16 provides that he is entitled in respect of any period of annual leave to "the rate of a week's pay in respect of each week of leave". The concept of a week's pay is then defined in Regulation 16.2 which, for this purpose, adopts the definition of that concept set out in Sections 221-224 of the 1996 Act.
23. The relevant provisions, for the purposes of this Appeal, are Sections 221(2)-(4) respectively, which are as follows:

Subsection (2) provides that:

"… if an employee's remuneration of employment in normal working

hours … does not vary with the amount of work done, 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 week in a week."

Subsection (3) provides:

"… if the employee's remuneration for employment in normal working

hours … 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 the last twelve weeks …".

Subsection(4) states:

"In this section reference to its remuneration varying with the amount

of work done includes remuneration which may include any commission

or similar payment which varies in amount."

24. As with the ERA, there is a three month time limit for bringing claims before the Tribunal but there is no exception here for a "series of deductions" as there is in that legislation. Accordingly, it is potentially important to know whether the claim can be advanced pursuant to the ERA or the WTR.
25. Regulation 17 of the WTR then deals with the situation where there may be an entitlement both under those Regulations and under some other provision, which includes a provision in a contract. The Regulation provides that the worker may not exercise the two rights separately, but may take advantage of which ever right is in any particular respect the more favourable. In other words, there is no double recovery in respect of the same loss.

The Tribunal's conclusions

26. The Tribunal considered that the contractual position and the position under the Working Time Regulations were essentially the same. They recognised that there were certain differences in wording between the two, but they concluded that the similarity of language and the timing of the introduction of the current working rule 18 were such that it was plain that the intention was to reflect in the contract the distinctions drawn in the statutory provisions.
27. Accordingly, they concluded that as far as the question of liability was concerned, the same result would be reached whether the focus was on the deduction from wages or on the rights under the Regulations. (The Tribunal did not consider the implications of any limitation provisions.)
28. They considered that the variable bonus should be taken into account; it was essentially a productivity bonus of a kind which meant that the amount of the week's pay did vary with the amount of work done, and that accordingly Rule 18.1.2 and Section 221(3) applied.
29. They also considered that the fixed bonus was part of the weekly wage in the sense that it was part of the remuneration which an Employee would inevitably receive for performing the basic weekly hours. (This was their preferred construction of the fixed bonus, although they held that in any event this bonus also varied with the amount of work done).
30. Therefore the Tribunal held the Employers had failed properly to make the appropriate calculation. They had ignored both these bonus elements, whereas they ought to have taken into account both, and they should therefore have calculated the pay in accordance with Section 221(3) and contractual term 18.1.2, that is, by averaging out the remuneration payable over the period of 12 weeks, as laid down in those provisions.
31. In reaching this conclusion, they considered that they could properly distinguish a decision of the Court of Appeal in Evans v The Malley Organisation Ltd t/a First Business Support [2003] ICR 432 which we will have to consider in more detail below.

Preliminary Observations

32. Before considering the arguments addressed to us, we make a number of preliminary observations.
33. First, the question of remedies has yet to be determined.
34. Second, it was submitted that the Employers had raised a number of arguments before the Employment Tribunal which have not been addressed by them. In particular, it was, according to the Employers, contended that the time limits would apply here so as to restrict the potential recovery for any of these Employees.
35. It is also submitted that there was a specific argument advanced to the effect that there had been either a variation of the contract as a result of workers accepting the way in which holiday pay had been calculated over a period of time, or alternatively, a waiver by Employees of their rights to seek to recover the holiday pay now.
36. Plainly, we are not in a position to know whether or to what extent these matters were canvassed below. However, the parties agreed that we should hear this appeal on the fundamental question of liability, and in particular, how the holiday pay ought to have been calculated, and that other issues can be raised again before the Tribunal at the remedies hearing.
37. Whether the Tribunal will accept that they were matters which were advanced in argument and which they ought to have determined in the substantive hearing, or whether they take a contrary view, or indeed whether they are prepared for other reasons to consider them at the remedies hearing, will be a matter for the Employment Tribunal to decide, at least in the first instance.
38. We obviously cannot hear any appeals on points in respect of which findings have not been made, and nor is it clear to us that the issues were raised with sufficient clarity before the Tribunal for them necessarily to have understood that these were contentious matters which they were expected to resolve at that time.
39. Mr Hogarth QC, Counsel for the Employees, raised a number of powerful arguments why the waiver argument in particular had no prospect of success in any event. He asked us to dispose of that aspect of the appeal at this stage. We sympathise with that request but we have not heard full argument on the point, and we think that the matter should be left to the Employment Tribunal, assuming it thinks it appropriate to hear the point. Accordingly, we say no more about those particular arguments in this decision.
40. Finally, there is a dispute whether the claim under the ERA can be advanced at all. The Appellants say that that matter is still to be heard by the House of Lords in the case of Commissioner of Inland Revenue v Ainsworth [2005] IRLR 46(CA).
41. In giving permission to pursue this appeal, His Honour Judge Clark stayed that aspect of the appeal relating to the Ainsworth case. It seems there may be some dispute as to precisely the ambit of that stay. The Employers are contending that Ainsworth may decide that even where there is a contractual right to a particular holiday pay, then it is arguable that the employee cannot pursue that right under the ERA but is compelled to take a claim pursuant to the WTR. We confess that we have not understood any issue before their Lordships to be framed in those terms. Rather we had understood that their Lordships will be faced with an argument that in the absence of any independent contractual claim the employee will be able to treat the rights under the WTR as conferring contractual rights which can be enforced under the ERA.
42. In any event, both sides accept that we should reach our conclusions as to the proper construction of the bonus schemes before us. The Employers will have to raise with the Employment Tribunal the potential relevance of any issue to be determined in Ainsworth, and whether its final determination should be stayed pending the decision of the House of Lords.

The nature of the appeal

43. We first consider the relationship between the two claims.
44. On any view, the contractual term is very similar to the rights conferred by the Regulations. We agree with the Tribunal that the contract must have been revised in order to give effect to the Regulations; the timing and language used make this plain. There are, however, certain linguistic differences between the two.
45. First, the contract refers to 'pay' and the Regulations to 'remuneration'. Second, the Regulations refer to remuneration varying with the amount of work done, whereas under the contract it refers to pay varying 'because of piecework or productivity bonus arrangements'. That, however, is under a heading which identifies the clause as one which is concerned with the case where pay varies with the amount of work done. Third, there is the phrase 'simply' in Working Rule 18.4.1 which qualifies "the normal weekly wage" and is not reflected in the statutory provision.
46. Mr Hand QC, counsel for the Appellants, rightly points out that the scope of the statutory right itself is dependent on a proper construction of the contract. He places significance on this in particular in relation to the proper classification of the fixed bonus. He says that the two rights have the same scope in the context of this case. Mr Hogarth submits that in certain respects the contract is wider than the statute. In particular, he contends that a proper construction of the WR agreement shows that any productivity arrangement falls within the terms of the contract, whether or not it results in the pay varying with the work done.
47. On any view the two claims are closely interrelated and we will consider them together.

The Arguments on Appeal

48. The arguments on appeal essentially replicated those advanced below. The facts are not in dispute and the case concerns the proper construction of the law as applied to those facts.
49. The first question to determine is whether the payment falls within the terms of section 121(2) or (3)) and the equivalent contractual provision.

Do earnings vary with the amount of work done?

50. Mr Hand contends that there is a clear distinction to be drawn between the two kinds of variable bonuses, namely the District and Mainline Schemes. Although the latter is discretionary, it is conceded that in practice it does operate in a way such that pay varies with work done. However, Mr Hand submits that the Tribunal erred in failing to consider the two variable bonus schemes separately; the Tribunal wrongly assumed that they were both of a similar nature. He contends that a proper analysis of the District bonus arrangement, where the threshold has to be achieved before the bonus kicks into place, would have shown that under such an arrangement pay does not vary with the amount of work done at all.
51. The Employer's case is that the proper characterisation of this bonus is decisively determined by the decision of the Court of Appeal the Evans case, to which we have made reference. That decision is of fundamental significance for the contention being advanced by the Employer, and it requires careful analysis.
52. In Evans the Applicant was employed as a sales representative, and he was paid a basic wage and commission in relation to contracts sold to clients. The commission became payable after a client had paid a quarter of the overall fees, and that was typically some nine months after the contracts were concluded. After the employee had resigned from his employment, his holiday pay was calculated solely by reference to his basic weekly rate of pay, which was in the region of £10,000.00 per year and without reference to the significant commission which he earned. The Employment Tribunal concluded that his remuneration did not vary with the amount of work done and accordingly his week's pay had to be determined in accordance with Section 221(2) of the 1996 Act. The Employment Appeal Tribunal allowed the Employee's appeal. They accepted that someone who received commission did not thereby have his earnings varied by reference to the amount of work done, but they concluded that Section 221(4) had given an artificial meaning to that concept and that accordingly the commission should have been taken into account.
53. On a further appeal, the Court of Appeal held that the EAT had erred and they restored the decision of the Employment Tribunal. They held that subsection (4) does not bear on the issue of whether the contract falls within subsection (2) or (3) at all; it merely makes it clear that if a contract otherwise falls within the terms of subsection (3) then any commission could be considered to be part of the relevant pay. Pill LJ explained the distinction between the two subsections in the following way (para 23):

"The distinction between subsection (2) and subsection (3) of section 221

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."

Lord Justice Judge pointed out that in any event the commission earned was not connected with the work that he did during the 12-week period immediately prior to his employment coming to an end. He described the effect of the commission payment in the following way:

"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 ob-

taining 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."

Lady Justice Hale agreed: she said this:

"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 "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."

54. Mr Hand submits that in Evans the variation in pay occurred not because of the amount of the work itself, but because of the success that was achieved. He argues that unless it can be said that the amount of work done directly caused the increase in remuneration, it is not legitimate to say that the pay varies with the amount of work done. He criticises the Employment Tribunal for what he submits is a simplistic analysis. He contends that a proper consideration of the District bonus scheme shows that the Evans principle applies equally here. The bonus for District workers is also paid depending on outcome; in the case of these workers it is only if the value of the work exceeds the basic cost (the figure is £2850) that the bonus is payable at the rate of 3%.
55. There are, he submits, a number of reasons why it is wrong to say that pay varies with the amount of work done. First, the workers may work more or less hard and each will receive the same unless the threshold position is reached. He contends that the existence of a threshold below which each worker is paid the same irrespective of the work done defeats any argument that pay varies with work done. Different workers may do different amounts of work but still receive the same pay.
56. Second, he submits that just as with the commission payments in Evans, the profitability, and hence the bonus payable, depends on a number of factors quite unrelated to the efficiency of the workers concerned, such the location of the area where work has been carried out, the hardness of the ground, the constructions found underground and so forth. All this, he submits, shows that there is no direct correlation between the amount of work done and the pay so that it cannot be said that one is directly proportional to the other.
57. Mr Hogarth has two responses to this. His first argument is that the Evans case is not engaged here at all. He submits that on a proper construction of WR18.4.2, it is clear that the holiday pay is calculated by taking into account any arrangement which can properly be described as a productivity bonus arrangement, whether it is one where pay varies with the amount of work or not. He recognises that this requires the Court to ignore the Heading to that clause because that suggests that the clause is indeed concerned with cases where pay varies with the amount of work done. He cites a paragraph 5.1(2) from the book by Mr Justice Lewison entitled "The Interpretation of Contracts" (3^rd Edition) (2004). In that passage, it is asserted as follows:
"A heading to a clause may be taken into account in construing the clause but it cannot override the clear words in a clause or create an ambiguity where but for the heading none would otherwise

exist".

58. He submits that here there is no ambiguity. The Tribunal found as a fact that there was "no clearer example of the straightforward productivity bonus"; he says that is obviously correct, and that determines this part of the case.
59. Mr Hand contends that this is an improper construction of the clause. He submits that the Heading cannot simply be ignored in that way; 18.4.1 and 18.4.2 envisage two contrasting situations and it is the heading of each which provides the key to wherein the contrast lies. He submits that it is plain that only productivity bonus arrangements which have the effect of varying pay with the amount of work done can fall within the terms of the clause.
60. We agree with Mr Hand's analysis on this aspect of the appeal. This is not a case, in our view, where the heading can simply be ignored. The two clauses envisage two quite distinct circumstances in which different rules have to be used to determine the weekly pay. Which provision applies depends upon whether the pay varies with the amount of work done or not. That seems to us to be the governing consideration here.
61. It may well be that, in fact, as Mr Hogarth submits, all productivity bonus arrangements do fall within clause 18.4.2, but if and insofar as they do not, we reject his submission on this point.
62. His alternative argument is that in any event the productivity arrangement is one where pay clearly does vary with the amount of work done. The Employees were being given extra reward for achieving a greater level of output within a fixed period of time. He submits that this is classically what a productivity bonus is for, namely to encourage greater performance, and it had precisely that effect. Moreover, the finding of the Tribunal that this productivity scheme did result in pay varying with work done was one of fact and could not be upset on appeal.
63. He argues that Evans was a different case where there was no direct link between pay and work at all. If there is a causally direct relationship between pay and the amount of work then it is appropriate to say that pay varies with work, and that is so even if there is no direct correlation at all points, and even if there is a threshold which had to be met before the bonus is triggered. He referred to certain passages from the judgments of the House of Lords in British Coal Corporation v Cheesbrough [1990]2 A.C.256 in which their Lordships had assumed rather than decided that productivity arrangements fell within what was the predecessor of subsection (3). He contended that it has always been assumed that they would be so categorised, and Evans could not have intended to alter that established understanding. He also noted that in Evans itself, at para 24, Pill LJ envisaged that a case may fall within subsection (3) even although there was a threshold which had to be achieved before bonuses could be paid.

Discussion and analysis

64. It is not entirely straightforward when a variable bonus should be properly analysed as a payment which varies with the work done and when it falls without that description. We do not accept, however, that the matter is simply a question of fact for the Tribunal. The facts they have to find are in what circumstances the bonus arises and how it operates, but the question of whether it has the effect of making the pay vary according to the work done is, it seems to us, a matter of law. Having said that, we would not readily overturn a decision of the Employment Tribunal which was sustainable on the facts found merely because we would have been minded to adopt a different view.
65. In our judgment, the approach adopted by Mr Hand is simply too narrow. The requirement that there should be a rigid correlation at all stages between the results achieved and work done would virtually prevent any piece work or productivity scheme from falling within the terms of Regulation 3.
66. We think some insight into the scope of Sub-Regulation (3) may be gleaned by considering the paradigm case of piecework, where workers are paid a sum for each item produced. Such an arrangement classically falls within the scope of Sub-Regulation (3) as Mr Hand accepts. However it cannot be said even in that case that there is a direct correlation between the amount of work done and the items produced. The number of widgets produced is not merely a function of effort; typically it will be related to other factors, such as the skill and experience of the workforce. A frenetic novice will not necessarily produce as many widgets as a slower and more measured old hand. What is being rewarded is effective performance: and that is measured by output. It is not always a precise measure: the batch of material may on some occasions be more difficult to work with than in others, or the tools may be poor, and a less effective performer may on occasions produce more widgets with a good batch of material than a better performer with a poor batch and older tools.
67. So even in this classic example of piecework, external factors may influence the outcome and therefore the perceived performance which in turn affects the overall reward. The correlation between performance and output is, therefore, never entirely direct. Even less direct is the relationship between quantity of work and output, at least if quantity simply means the effort of the individual worker.
68. In our view it is inevitable that in all circumstances where pay is related to work done, as opposed simply to payment for the hours worked, there will have to be some objective measure relating to work output which will be used to define or determine how much work has been done. There can be no other independent assessment of the level of work performance. But focussing on results will never wholly reflect the effort put in, and success will always be influenced by factors which are independent of the worker himself. This does not, however, forbid the conclusion that pay varies with work done, albeit that it does not do so in a rigid linear way.
69. We do not think that Evans is suggesting that standard piece work or productivity arrangements of this kind fall out with the scope of sub-section 3. We agree with the Tribunal that it is essentially a question of causation. With piece work and productivity arrangements of this kind, there is a close relationship between performance and results. The results are a tolerably accurate, albeit not precise, measure of the performance or work done. In the case of commission arrangements of a kind which occurred in Evans, the link is far more indirect. No doubt in a general way a worker is likely to be more successful the more effort he makes to obtain an order, but success in that regard is far from guaranteed. The outcome is more speculative: success is contingent on factors quite unrelated to the worker's performance. A serendipitous worker may stumble upon success because he happens to have approached the right potential client at the right time; another may work equally as hard or even harder and yet fail to be rewarded at all by his efforts. In such cases, results are not a fair or even tolerably accurate measure of performance in the way in which they are in piece work and productivity arrangements.
70. Accordingly, we reject the submission of the Appellants that the fact that there may be external factors which cause the same level of performance to lead to different output demonstrates that there is no direct correlation between work and pay. To a greater or lesser extent that will almost always be the case.
71. In our judgment where pay is related to output and output is in turn significantly connected with level of performance, then it can properly be said that the pay varies with the work done. Typically, a higher level of performance, whether in terms of speed or efficiency in other ways, is likely to lead to a greater output, however that is measured.
72. Other factors independent of the worker may reduce that output in certain circumstances or increase it, and one would assume that in the normal way they would cancel each other out over a significant period of time. Sometimes it would be easier to lay pipes in one particular area than would normally be the case and sometimes it would be more difficult. It would be reasonable to assume that these are factors brought in to the bonus scheme which is adopted.
73. Nor do we think that there is any substance in the argument that the pay does not vary with work because there may be circumstances where different performance yields the same rewards, which is the case where the threshold is not even reached. This does indeed show that there is not a correlation at every level between performance and pay- because below the threshold the pay will be the same even where workers have performed differently- but in our view there is that correlation once a certain level of performance is achieved, and that is sufficient to justify the conclusion that the pay varies with performance. Were it otherwise then piecework arrangements which envisaged standard pay for so many widgets but bonuses for those produced thereafter would also be excluded from the scope of subsection (3). We do not think that can be right. The fact that pay only varies with the amount of work above a certain level still links pay directly to the amount of work.
74. It follows that we are satisfied that the proper analysis here is that this was, as the Tribunal found, a classic productivity scheme. More efficient working led, at least once the threshold was reached, to higher rewards.
75. It is in our view unreal to say anything other than that this was a subsection (3) case.
76. It follows that we think that as a matter of contract too, it fell within the terms of Working Rule 18.4.2 and therefore the calculation made by the Employers was wrong. .

The fixed bonus

77. We now turn to consider whether the fixed bonus also should be considered part of that pay. The Tribunal was in no doubt that it was. At one part of its judgment it appeared to hold that this part of the bonus also was variable and independently fell into subsection 3 and WR 18.4.2. However, that conclusion is plainly at odds with the facts as found by the Tribunal, namely that the bonus was paid for attendance and did not vary with work done, and Mr Hogarth does not rely on this aspect of the decision. He relies on the Tribunal's preferred construction that the bonus itself was fixed and did not vary with the amount of work done but nonetheless was simply part of the basic pay for holiday purposes. The Appellants dispute this and contend that this element of the pay is not to be treated as part of the pay for determining holiday pay whether it is fixed or variable.
78. There are three arguments advanced in support of the Appellant's submission. First, the use of the word "simply" in WR 18.1.shows that all that it was intended to pay was the basic wage shorn of any bonus payments. It is said that this is its natural meaning when read against the background knowledge known to the parties, which is the way such contracts should be construed: see Investors Compensation Scheme Ltd v West Bromwich Building Society 1998] 1 WLR 896.
79. Second, it is argued that assistance is to be derived from the way in which overtime rates are determined. They are expressly said to be calculated on the "normal hourly rate". This in turn is defined as follows:

"The expression 'normal hourly rate' in this agreement means the …

weekly basic rate of pay as above, divided by the hours defined in

Working Rule 3 "Working Hours". Additional payments for inter-

mittent skill or responsibility, occasional skilled work, work at heights,

Work in adverse conditions or bonus payments are not taken into account

for calculating the "normal hourly rate"" (emphasis added).

80. It is submitted that if the normal hourly rate is to be assessed free from bonuses, so should the normal weekly wage be similarly calculated. It is the product of the average hourly rate and the basic weekly hours.
81. Third, it is argued that in any event the payment of the fixed bonus is simply for attendance at work; it is not paid for the work actually done or even for being available for work.
82. The Respondents reject each of these arguments. They contend that they are specious and that the normal weekly wage means no more or less than what would be received as a matter of course for any worker completing a week's work. Since the fixed bonus would be part of the pay, it is counted for the purpose of fixing holiday pay. The fact that overtime rates are expressly calculated without reference to bonus tells us nothing about the proper construction of this Working rule, or indeed Regulation 18 of the WTR.
83. We agree with this analysis. In our opinion there can be no doubt that a week's pay covers the remuneration which the employer is obliged to pay under the contract once the contracted hours have been worked. We would expect holiday pay to include all such compulsory elements of pay. We do not consider that it assists to rely on the definition of hourly wage; that definition is found in a different clause and is used for a quite different purpose. Nor do we accept that the fact that the bonus is fixed for attendance alters its essential nature as an element in the make up of a week's pay.
84. It follows from this that in our view this will always be an element of the week's pay, and that is so whether the week's pay properly analysed does vary with the work done, as the Tribunal found, or whether it does not. Just as the fixed pay for the hours worked must be taken into account and be treated as part of a week's pay even although that element is fixed and it is the variable bonus element which causes the pay to vary with the work done, so similarly this fixed bonus would be so treated. It obviously does not itself have to be an element of pay which varies with the work done to be considered as part of the pay falling within Working Rule 18.4.2 or subsection (3).

Conclusion

85. These appeals therefore fail. The Employment Tribunal reached the correct result in a succinct and essentially sound analysis of the contract and the statutory provisions. As we have indicated, it will be for the Tribunal to determine whether it should now hear further arguments directed to limitation and the potential defences of variation and waiver.
86. The parties are keen that all outstanding matters should now be considered at one hearing, although we suspect that a case management conference may be necessary to identify with clarity the issues still in dispute. That, however, is now a matter for the Tribunal.