A long battle between airline pilots and British Airways may have paved the way for more generous holiday pay for ground-based UK workers.

Background

When the Working Time Regulations were introduced exactly 15 years ago, little thought appears to have been given to how holiday pay should be calculated. Instead the government of the day reached for a shortcut. It cross-referred to the calculation of a week’s pay in the Employment Rights Act, which had been used for many years to calculate redundancy payments and the compensatory award for unfair dismissal.

Nearly ten years ago, in Bamsey v Albon Engineering, the Court of Appeal dismissed arguments that this shortcut had failed to comply with the Working Time Directive, the EU legislation that the Regulations had been brought in to implement. The dispute arose because the Employment Rights Act excludes non-contractual overtime from the calculation of a week’s pay. Mr Bamsey and a number of other workers claimed that this approach was not appropriate for calculating holiday pay, since workers who were obliged to do overtime if offered, but were not contractually guaranteed to get it, would often end up with holiday pay which was well below their “normal wages”. In Mr Bamsey’s case his typical working week was 60 hours including compulsory overtime, but his core contractual hours, on which his holiday pay was calculated, were only 39 hours.

This case had not been seriously challenged until a group of British Airways pilots took their dispute to the Supreme Court.

The BA case

British Airways v Williams was not in fact about the Working Time Regulations. The dispute arose under the rather more obscure Civil Aviation Working Time Regulations. However the wider significance of the case derives from the fact that the Civil Aviation Regulations implement the Aviation Directive, which is very similar to the Working Time Directive. In fact the key words, about entitlement to four weeks’ paid holiday, are identical in both directives.

The main focus of the pilots’ complaint was that their holiday pay excluded a flying pay supplement, which was paid at the rate of £10 per flying hour. Their case first reached the Supreme Court in 2010 when it referred some questions about the interpretation of the Aviation Directive to the European Court of Justice. The European Court’s decision came back a year later. Another year passed before the Supreme Court ruled on the implications of the answers it had received, in October 2012.

To cut a very long story short, the Supreme Court has said that BA must include the flying hours supplement when calculating pilots’ holiday pay. That’s because the ECJ had said that holiday pay must “correspond to the normal remuneration received by the worker”. Expanding this statement, the ECJ explained that payments that were “linked intrinsically” to the tasks the worker is required to perform under the employment contract must be included. It added that it was for the local court to work out how to apply this principle to the facts of each case.

It won’t be easy to work out how to include the flight supplement in the pilot’s holiday pay, due to regulatory restrictions on a pilot’s maximum flying hours and other factors. That’s why the Supreme Court has now delegated this task to the employment tribunal. The precise calculations, unlike the broad principle that emerges from this case, are unlikely to be of interest outside the airline industry.  

Wider implications

It’s easy enough to calculate holiday pay when a worker is paid a fixed monthly salary, regardless of the number of hours worked. But what of the increasingly large band of workers with variable hours, where the pay they receive depends to a greater or lesser extent on the hours worked?

The old confidence in the tried and tested (though fiendishly complicated) provisions on a week’s pay in the Employment Rights Act appears to have evaporated. Instead we are left with a rather vague pronouncement from the ECJ that holiday pay must correspond to “normal” remuneration.

Over the summer there were two developments which brought this issue to prominence. First there was the announcement by John Lewis that it would be returning over £40 million in underpaid holiday pay to its staff. Secondly an employment tribunal decision was released which is the first reported judicial decision to examine the wider implications of the BA case.

Neal v Freightliner Ltd is no ordinary employment tribunal case. Fought by QCs on both sides, it runs to over 30 closely typed pages. In essence Mr Neal complained that his holiday pay was calculated on the basis of seven hour shifts, though in practice he almost invariably worked nine hour shifts. It was something of a grey area whether these extra hours were compulsory (as in Bamsey) or voluntary. In either eventuality, the employment judge ruled that the extra hours should be taken into account, by averaging his total remuneration over the standard 12 week reference period. That solution involved some pretty nifty re-drafting of the statutory provisions on a week’s pay, but such an approach is becoming increasingly common in the employment tribunal when domestic legislation needs to be construed in line with an EU directive.

More worrying still for employers, the employment judge went on to decide that these underpayments of holiday pay counted as a series of unlawful deductions from wages, and so the claim could be backdated to the beginning of Mr Neal’s employment in 2007.

As employment tribunal decisions do not create binding precedents, the correct way of calculating holiday pay in similar cases will be uncertain for a while yet. In addition Neal is currently under appeal to the Employment Appeal Tribunal and there are also other cases in the pipeline.

However, these developments provide a strong incentive for employers to look at their holiday pay arrangements and assess the risk of claims for underpayment of wages. Depending on the circumstances, it may be better to engage with workers at this stage, rather than wait for claims to materialise.

It is worth adding that in theory it is possible to draw a distinction between the first four weeks of holiday – which are the subject of these new developments – and any remaining holiday entitlement, which are not underpinned by the Directive. In the latter case employers remain free to decide on the appropriate level of holiday pay, even if the entitlement falls within the additional eight days of statutory holidays introduced in 2007. But some may conclude that life is complicated enough without running two completely different holiday pay calculations.