UK: Increasing Holiday Pay?

In British Airways v Williams and others the Supreme Court considered whether a pilot's holiday pay should take into account certain contractual supplementary payments. It confirmed that holiday pay should be calculated on the basis of normal remuneration, which will include remuneration intrinsically linked to the performance of contractual tasks. Holiday pay should not, however, extend to remuneration that is intended to cover ancillary expenses and costs.

Background to Supreme Court's decision

Under collective agreements incorporated into their contracts, BA pilots were entitled to basic pay plus two supplementary payments (a "flying pay supplement" and a "time away from base allowance"). However, in periods of statutory annual leave the pilots were only paid basic pay. The pilots claimed that the two supplements should have been included in their holiday pay calculation and brought claims in the Employment Tribunal. Ms Williams acted as lead claimant for some 2,750 claimants employed by BA.

An Employment Tribunal and Employment Appeal Tribunal found in the pilots' favour; however, the Court of Appeal overturned the decision and found that there was no breach where BA paid the pilots basic pay only during periods of leave.

The pilots appealed to the Supreme Court, which concluded that the requirements of the Working Time Directive and the Aviation Directive (which governed the calculations of payments for leave and have been incorporated into UK domestic law via the Working Time Regulations 1998 and the Civil Aviation (Working Time) Regulations 2004 respectively) were unclear. Accordingly, the Supreme Court referred a number of questions to the Court of Justice of the European Union ("CJEU") seeking clarification on the meaning of the two Directives.

Last year the CJEU responded by stating that, in line with the annual leave provisions of the Working Time Directive, the Aviation Directive requires that airline pilots are entitled not only to basic salary but to "normal remuneration" during statutory annual leave. Its reasoning was as follows:

  • "Paid annual leave" under the Working Time Directive meant that workers on holiday should receive their normal remuneration. The purpose of holiday payment is to put workers in a position which is comparable to the position they are in during periods of work
  • Remuneration linked intrinsically to the performance of tasks which a worker is contractually required to perform (in the case of airline pilots, payments in respect of time spent flying) must be taken into account when calculating holiday pay
  • In contrast, however, components of remuneration which are intended exclusively to cover ancillary costs (e.g. travel and subsistence) arising at the time of the performance of contractual duties need not be taken into account when calculating holiday pay

The case was then returned to the UK Supreme Court to determine whether various components comprising the pilots' total remuneration met the criteria to be included in the holiday pay calculation.

Supreme Court

The Supreme Court concluded that the claims should be remitted to the Employment Tribunal for further consideration of the appropriate payments to be made to the pilots in respect of the periods of leave. Their reasoning was as follows:

  • Holiday pay should include remuneration intrinsically linked to the performance of contractual tasks. We therefore expect the Employment Tribunal to find that the "flying pay supplement" (which is a guaranteed payment a pilot receives when flying) should be included for the purposes of calculating holiday
  • As to the "time away from base allowance", the Employment Tribunal must decide whether the parties genuinely intended that such payments would exclusively cover costs for time spent away from home

What this decision means for employers

This case must now go back to the Employment Tribunal to decide whether or not the disputed payments should be included in the calculation of holiday pay. Employers in the aviation industry should therefore watch out for the Tribunal's decision which, if decided in favour of the claimant pilots, will be highly significant, potentially resulting in increasing employers' costs.

Further, given that the CJEU worked on the basis that the same principles apply to the Working Time Directive (as had been applied to the Aviation Directive), the decision has a wider application to employers in other sectors. This is because UK law must be interpreted so far as possible to give effect to the principles of EU law- which means that the UK rules on calculating holiday pay may have to be interpreted in line with Williams. Although the Directive leaves the calculation of holiday pay to national legislation (and for these purposes, under UK law a "week's pay" has a specific definition set out in sections 221 to 224 Employment Rights Act 1996), the CJEU first ruled (in Robinson Steele v FD Retail) that workers must continue to receive "normal remuneration" during annual leave. Williams has now expanded this concept (as described above) but, in our view, it still leaves unclear what precisely amounts to "normal remuneration".

Accordingly, it will be open to employees to challenge the fact that certain payments which the UK courts have previously been ruled to be outside the definition of a week's pay and which employers currently exclude from holiday pay (for example, certain commission payments and non-compulsory overtime) should actually be incorporated in the calculation. Public sector workers will be able bring a challenge based on the principles set out in Williams. A challenge by a private sector worker will be trickier since it is far from clear that the provisions of the Employment Rights Act in relation to a week's pay (which are very explicit) could be interpreted to give effect to the Working Time Directive's requirements as set out in Williams.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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