450: EAT provides guidance on holiday pay after Agnew

In British Airways plc v De Mello and others, the EAT has given important guidance on holiday pay and the approach Tribunals should take when applying the Supreme Court’s 2023 judgment in Chief Constable of the Police Service of Northern Ireland v Agnew.

Most mobile air transport workers are covered by the Civil Aviation (Working Time) Regulations 2004 rather than the Working Time Regulations 1998, but holiday pay provisions are applied using the same basic principles. This case involved a dispute over which flying allowances should have been included in the holiday pay of British Airways (BA) cabin crew. Multiple claims were brought initially, most of which settled in 2013 when BA introduced a new pay structure.  However, six claimants proceeded with their claims.

The Employment Tribunal made three key findings:

• Several allowances, such as the meal allowance, formed part of normal remuneration and should be included in holiday pay, but others, such as duty free sales commission and Back-2-Back payments, should be excluded.
• A gap of more than three months would break a series of deductions.
• BA was entitled to designate the first tranche of holiday as statutory leave.

The findings were appealed in the EAT, which has now provided helpful guidance on the principles surrounding these three main issues.

Determining whether deductions from holiday pay are part of a series

Underpaid holiday claims can be made under the unlawful deductions from wages provisions in the Employment Rights Act 1996. Claims must be submitted within three months of the last in a series of deductions. In the 2016 case of Fulton v Bear Scotland Ltd, the EAT held that a series of deductions would be broken where more than three months had elapsed between them. However, in Agnew, the Supreme Court held that this three month restriction was wrong. Deciding whether deductions form part of a series is a question of fact, taking into account all relevant circumstances including their similarities and differences, what links them together, and the degree of repetition.

Applying Agnew, the EAT held that the unlawful deductions claimed here were sufficiently similar to form part of a series since they all came about due to BA’s failure to factor in allowances that should have counted towards normal pay. However, the question of whether the deductions were linked in time remains to be decided by a different Employment Tribunal in relation to each claimant. The EAT emphasised that when deciding this issue, Tribunals must keep in mind the statutory purpose of the holiday regime to protect vulnerable workers.

Whether employers can designate periods of holiday as statutory or contractual

Many workers are entitled to statutory leave and additional contractual leave. In Agnew, the Supreme Court held that all leave should normally be viewed as coming from a composite pot, which is how most employees will view their holiday entitlement. This created uncertainty as to whether it is possible for employers to specify the order in which workers must take their leave.

In this case, BA argued that it had designated the first tranche of leave taken by the claimants as statutory leave, and that contractual leave was taken afterwards. The EAT held that there was no statutory or contractual power allowing BA to do this. In addition, BA had not differentiated between the leave at the relevant time and could not do so retrospectively. Overturning the Employment Tribunal’s finding, the EAT held that all of the claimants’ holiday therefore had to be treated as part of a composite whole.

Determining which allowances should be included in holiday pay

Holiday pay must include all elements of normal remuneration which are intrinsically linked to the performance of duties under the employment contract, but not payments to cover ancillary or occasional costs. The EAT confirmed that whether an allowance is a performance or an expenses payment will depend on all the facts and circumstances as well as the overall picture. In this case, the EAT held that the Tribunal’s approach to assessing the various allowances had been too mechanistic and had failed take the overall picture into account.

This case has now been remitted to a different Employment Tribunal to decide the remaining issues. Although uncertainties remain, the EAT has provided useful guidance on how to deal with holiday underpayment claims and how to interpret Agnew. The EAT’s judgment also illustrates the potential difficulties involved in calculating holiday pay where a remuneration structure includes many different allowances.