There has been a lot of discussion in the employment law world around holiday pay calculations and the concept of a “series” of deductions since the Supreme Court’s decision in Agnew [2023]. Both were recently considered further by HHJ Auerbach, presiding over the Employment Appeal Tribunal (EAT), in the case of British Airways Plc v. Mello and ors.
There were two pivotal issues for the EAT to determine in this case. Firstly, the interpretation of a “series” of deductions under the unlawful deductions provisions of the Employment Rights Act 1996 and, secondly, how to determine whether various allowances should be included in the calculation of holiday pay for BA cabin crew. The EAT also had to consider the question of designating the order in which holiday is taken.
A series of deductions
When determining the first issue, the EAT overturned the tribunal’s decision, which had been made before Agnew, instead accepting that the Supreme Court’s decision in Agnew overruled the previous understanding that a gap of more than three months between deductions would break the “series”.
The EAT went on to conclude that all deductions from holiday pay should be considered as part of an unbroken series if they stem from the common fault of not calculating holiday pay based on normal pay. It held that the tribunal had erred in treating each allowance separately, so each allowance had to be assessed as part of a separate series. The EAT’s view was that the employer’s failure to include different allowances should have been treated as part of the same series of deductions as they arose from the same error.
Allowances to be included in holiday pay
The EAT also considered the test for determining which allowances should be included in holiday pay calculations and which should not be. It confirmed that the correct approach was to consider all the relevant facts and circumstances, and decide whether a payment was intrinsically linked to performance or made genuinely and exclusively to cover costs. A payment must fall entirely on one side of this distinction – it cannot be categorised as partly performance-based and partly expenses.
Designating which holiday is taken when
The EAT also had to decide whether BA had the statutory or contractual power to designate which periods of leave were statutory entitlements under the Civil Aviation (Working Time) Regulations 2004. Whilst this is possible under the Working Time Regulations 1998, there is no equivalent provision under the 2004 Regulations. Consequently, the EAT determined that BA did not possess a statutory right to designate periods of statutory leave.
The EAT acknowledged that the Agnew decision did not rule out the possibility that a contract could allow an employer to specify when statutory leave is taken. However, the EAT noted in passing that any such power, whether under a contract or Regulation 15 of the Working Time Regulations, could not be used to worsen an employee’s situation regarding when they take their leave.
Even if the designation power did exist in this case, the EAT determined that the tribunal made a mistake by saying BA had made such designations. The clauses BA cited did not grant them this ability and, moreover, it was not established that BA consistently exercised the claimed right.
The EAT also disagreed with the claimants’ argument that they could decide as part of their tribunal claim which leave counted as which type. Since the claimants had not indicated any such designations at the time, the EAT rejected retroactive designations. Consequently, the EAT ruled that all types of leave should be treated as part of the composite pot.
Conclusions
This decision provides important guidance for dealing with holiday pay, emphasising the significance of the statutory purpose and the overall context of the factual matrix when considering whether there is a “series” of deductions. It also highlights the importance of identifying a specific right to designate the order of leave and then clearly exercising that right in advance. As the case has been remitted to the tribunal for further determination on specific points, the employment law community will be watching closely to see how it applies these principles.
Updated government guidance
Unrelated to this case, the government has published updated guidance on the holiday pay and entitlement reforms, to help employers calculate leave and pay correctly. The guidance provides useful worked examples to assist employers in running their calculations. Notably a problematic example that was used in the previous guidance issued in January to explain the definition of a “part-year worker” has been removed. The new guidance clarifies that the regulations require that there must be periods of at least one week “for which they are not paid” in order for an individual to be considered a part-year worker. This means that it is possible for a part-year worker to be paid equally throughout the year so long as there are periods of at least a week when they do not work and they are not paid “for” those non-working weeks.
