EAT provides guidance on holiday pay after UK Supreme Court’s ruling in Agnew

The Employment Appeal Tribunal has for the first time handed down a decision on the application of the Supreme Court’s ruling last year in Agnew, that a three-month gap in deductions does not necessarily break a "series of deductions". The case provides helpful guidance for employers on what payments will be included in holiday pay and the limited scope for arguing that holiday pay claims are out of time. The case is called British Airways v De Mello. We’ll ask a holiday pay expert where it leaves employers. 

A reminder. Holiday pay claims are often brought as unlawful deduction from wages claims, the deduction being the failure to pay the full amount of holiday pay due. Before last year's Supreme Court judgment in Chief Constable of the Police Service of Northern Ireland v Agnew previous case law held that if there was a gap of more than three months between deductions, the "series" would be broken so preventing a claimant going further back in time in their claim in order to recover earlier underpayments. That limitation on the employer’s liability was overturned by the Supreme Court in Agnew and the EAT has now followed Agnew in the De Mello case. It means claimants can link a series of underpayments into one claim, albeit with the proviso that the claim is brought within three months of the last deduction in the series. Employers in Great Britain can take some comfort from the fact that The Deduction from Wages (Limitation) Regulations 2014 limits claims for backdated holiday pay to a maximum of two years. However, those regulations don’t apply to Northern Ireland which means employers in Northern Ireland do not enjoy the benefit of that 2-year backstop so are exposed to a greater potential liability. 

The facts of this case briefly. The claimants were cabin crew for British Airways and they had a complicated pay structure including multiple different allowances. They argued these allowances should be included as "normal pay" when calculating their holiday pay. Since BA had not included the allowances, they made claims to the Employment Tribunal for unlawful deductions from wages. 
The case reached the EAT with three main issues at stake: 

First, which allowances should be included in holiday pay? The legislation says a worker must be paid their "normal remuneration" during periods of annual leave so that they are not discouraged from taking leave. “Normal remuneration" for these purposes means pay which is intrinsically linked to the performance of contractual tasks, so that would exclude expenses. The EAT said when it comes to the question of whether a particular allowance should be included in holiday pay, it’s ‘all-or-nothing’. So, either the employer is liable for the whole payment or none of it, and it cannot be categorised as partly performance-based and partly expenses. 

Secondly, which payments form part of a series of deductions? The EAT applied the Supreme Court’s test in Agnew, namely whether the deductions were ‘sufficiently similar’ and ‘temporally connected.’ On these facts, the EAT decided all the deductions were linked because they all arose from the same approach of not calculating holiday pay based on normal pay.

Third, which type of holiday leave is being taken? The three types of leave are EU-based leave, UK statutory leave and contractual leave and they are paid at different rates. So can the employer specify the order in which workers take their leave and so dictate the level of pay and choose the least generous rate first? On the facts, the EAT ruled against BA on the basis they had not made any such designation and so all leave days were to be treated equally as part of a composite whole. However, the EAT has left open the possibility of an employer being able to designate leave provided they made it clear in the contract of employment. In other words, the employee needs to know that that is how their holiday leave is being treated from the outset.

So, let’s consider how this rules impacts on employers. Anthony Convery has been helping a number of clients with their holiday pay structures and earlier he joined me by phone from Glasgow to discuss the case. So what does he think is the most significant aspect of this ruling?

“Anthony Convery: The most significant thing about De Mello is what it says about the order in which leave is taken. There is an ongoing uncertainty about this and it stems from the earlier decision of the Supreme Court in Agnew which said that every day of holiday is a composite of all the different types of leave. So there's regulation 13 leave, 4 weeks under the Working Time Regulations. There's also regulation 13A leave under the Working Time Regulations which is an additional 1.6 weeks and then in many cases employers have additional contractual leave. Agnew said the starting point is that every day is a composite of all of those different types of leave, which is hugely complicated and full of practical problems for employers. What Agnew did is it left open the possibility that employers could proactively designate the days of leave and they could say to their workforce well, the first 4 weeks you take of any annual leave will be the regulation 13 leave, for example, and what De Mello does is it confirms that that is open as a possibility. There are some additional comments that the EAT makes in De Mello, and there is still  some uncertainty around this, but at least in principle the De Mello decision establishes that it is potentially possible to designate the leave and that is what we've been advising employers. We’ve been telling employers since Agnew that the best thing that they can is to proactively designate the leave for the workforce and tell them which order it's taken and there are two main reasons for that. The first is that many employers pay different rates of pay for the different types of leave because the 4 weeks regulation 13 leave is often based on average pay to comply with the Working Time Regulations but the rest of the leave doesn't necessarily need to be in many cases. So from that point of view, it's important to be clear to people about which day represents which type of annual leave. Then secondly, designating the leave is helpful when it comes to carry over of holidays from one leave year to the next leave year because the rules are slightly different depending on the type of leave it is, so it helps to be clear about which days have been taken and which days are outstanding.”

Joe Glavina: “So if employers are allowed to designate the order in which leave is taken, Anthony, does that have to be in the contract of employment or can it just be mentioned in the holiday leave policy? 

Anthony Convery: “It’s  helpful if it's in the contract because then it's clear that there's a contractual power to designate the leave, or the position is set out contractually, but I don’t think it's absolutely essential because the Working Time Regulations allow employers to designate when leave is taken. So the advice we are giving is it should be possible to set it out in a policy or a notification to employees, as well, albeit that the contractual position is the strongest position to be in if you can put it in your contracts.”

Joe Glavina: “Finally, what about allowances, Anthony? What was the EAT’s approach to allowances?”

Anthony Convery: “De Mello was about the aviation regulations but very often the principles from the case law concerning the aviation regulations are applicable to the Working Time Regulations and in relation to allowances, one of the things that De Mello looked at was certain fixed allowances which the tribunal had determined were expenses and were outside of the scope of holiday pay but the EAT in De Mello said that was the wrong approach to take and that it couldn't just be assumed that the payments were expenses and the correct approach is to look at the nature of the of the allowance. If it’s intrinsically linked to the performance of tasks that the worker is required to do under the contract then it should be included in holiday pay. The tribunal had taken the wrong approach of making almost the starting point that it was an expenses payment, and then putting the onus on the employee to show that it wasn't an expenses payment, and that was the wrong approach to take. So I think what De Mello shows is that in assessing whether a payment is included in holiday pay it's a very fact specific question but it is about looking delving into the nature of the allowance and whether it's intrinsically linked to the contract and, indeed, now that we have the amended Working Time Regulations all these factors are now spelled out in legislation which makes the position much clearer.”

That case is called British Airways v De Mello and is a decision of the Employment Appeal Tribunal. We’ve included a link to it in the transcript of this programme.

LINKS
- Link to judgment: British Airways v De Mello