The law on calculating statutory holiday pay has been in a state of flux for several years and a body of case law has built up about what should be included when calculating it. Pay during annual leave must be calculated so as to be equivalent to basic pay and all other components of normal remuneration intrinsically linked to the performance of tasks (e.g., commission and regular overtime pay), but excludes any payments which are intended to exclusively cover occasional or ancillary costs (e.g., expenses)
Should regular payments for meal allowances be included in the calculation of statutory holiday pay?
Possibly.
On 19 April 2024, the Employment Appeal Tribunal handed down its decision in British Airways Ltd v De Mello & Ors relating to whether a number of allowances, including a meal allowance should have been included in the calculation for statutory holiday pay and the correct approach in the concept of a ‘series' of deductions for time limit purposes, in light of the decision of the Supreme Court in Chief Constable of the Police Service of Northern Ireland v Agnew.
Expenses or normal pay
British Airways operated a flat meal allowance for cabin crew, to save the burden of dealing with thousands of expense receipts per day. The allowance was generous, exceeding the costs incurred. A dispute arose as to whether the allowance should be viewed as ‘linked intrinsically to the performance of tasks', and therefore part of normal pay, or an expenses payment, and not part of normal pay.
The Employment Tribunal (ET) held that the meal allowance, or a portion of it, should be included as part of holiday pay. The matter was appealed to the Employment Appeal Tribunal (EAT).
The EAT decided that the ET had not approached the issue correctly. The single issue for the tribunal was to determine the real basis of the payment; was it made genuinely and exclusively to cover costs or was it a performance payment. It was not possible to allocate a proportion of the allowance as an expense; the payment is one side of the line, or the other.
The EAT went through the factual situation pertaining to meal allowance and noted that the entitlement is triggered when a member of cabin crew is on duty during any mealtime and is payable even though food for the crew is always available on board and the formula for calculation is for a generous full meal, described as including by way of example a seven-course meal.
The EAT went on to say that that fact that the meal allowance is a fixed amount and contains ‘an element of windfall' does not necessarily preclude it from being treated as an expense allowance. However, if it is at a very high level that is ‘obviously' not wholly required to cover expenses, that may be treated as decisively tipping the scales in favour of the conclusion that the real basis on which it has been made is as a performance payment.
The issue was returned to the ET to determine afresh whether meal allowances were or were not therefore part of normal pay to be included when calculating holiday pay.
Time limits – series of deductions
Claims for underpaid holiday under the unlawful deductions from wages jurisdiction must be submitted within three months of the last in a ‘series of deductions'.
In Bear Scotland the EAT held that there would be a break in a ‘series of deductions' where more than three months has elapsed between deductions. Further, the rules for including pay normally received when calculating holiday pay (as opposed to basic pay only) apply only to the four weeks basic Working Time holiday. The EAT in Bear Scotland held that employers could determine which type of leave was being taken when. Therefore, employers could decide that the first four weeks of working time holiday was taken first in the holiday year. As the holiday pay rules did not apply to any payment of holiday for the additional 1.6 weeks of Working Time holiday and any contractual holiday above, those payments could break the chain of deductions, limiting an employer's exposure to a series of deductions for underpaid holiday pay.
In Agnew the Supreme Court held that a ‘series' should be given its ordinary meaning and when deciding whether deductions formed a series, all relevant circumstances should be considered, including their similarities and differences, their frequency, how they came to be made and applied, and what links them together. There was no need for the series to be next to each other in a sequence, thus one correct payment of holiday pay did not break the ‘series' of deductions.
Further, the source of leave is irrelevant to workers who are likely to view their annual leave entitlement as one ‘composite' whole. Therefore, the Supreme Court held that “if ….. it is not practicable” to distinguish between different types of holiday, all holiday should be viewed as a composite pot.
Despite being a Northern Ireland Supreme Court decision, it was agreed that Agnew should be treated as an authoritative statement on the interpretation of the meaning of a ‘series of deductions' and the decision in Bear Scotland on a three month gap could not stand.
A further issue in the British Airways meal allowance case was whether the ET had erred in treating each allowance separately when considering a series of deductions and whether certain claims were out of time. The Claimants claimed all deductions were deductions from holiday pay. The EAT considered the approach taken by the Supreme Court in Agnew and held that the deductions were of ‘sufficient' similarity to be regarded as a series, as they all related to deductions from holiday pay.
As to the designation of holiday ( ie whether the four weeks could be designated as being taken at a certain time) the EAT accepted that Agnew did not preclude the possibility of the contract granting such power in a given case. The EAT expressed the view that the exercise of any such power could not be relied on to make a worker's position in relation to a time point less favourable that it would have been, had it not been exercised. Irrespective, BA had not designated holiday and one type of holiday could not be differentiated from another. Therefore, holiday was a ‘composite pot'.
Comment
The EAT gave useful guidance that employment tribunals will be directed to on unlawful from deductions of holiday pay claims. It is clear that an allowance must fall one side or the other.
However, the most interesting aspect of the judgment and, which is likely to be more relevant to employers is the EAT's application of the Supreme Court's decision in Agnew. In light of the EAT's decision it may prove difficult in most cases to convince a tribunal that they should find that there is no series of deductions relating to holiday pay. The two-year back-stop limit under statutory regulations still applies.
The EAT seems to accept that a contractual term could potentially give the employer power to ‘designate' leave, which is helpful. Although it is unclear what is meant by its comment that such power could not be relied on if it puts a worker in a worse position. This is could well be a further area of litigation.
The EAT rather unhelpfully did not give any guidance on how holiday pay on a ‘composite pot' should be calculated, so the saga seems to continue.
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