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Background: Under the Working Time Regulations (WTR) workers (including employees) are entitled to 5.6 weeks paid leave per year (4 weeks to implement the EU Working Time Directive (WTD) and an additional 1.6 weeks).
In general terms, holiday pay should include any payments which are directly linked to the employee’s performance of their contractual duties (e.g. overtime and commission) rather than additional (or occasional) expenses.
If such payments are not included, workers may succeed in a claim for unlawful deductions from wages in respect of underpayment of holiday pay. To bring such claim the worker has to do so within three months of the last wage payment with an unlawful deduction. If they succeed in showing that there was an unlawful deduction, they can then go on to claim for any further unlawful deductions before this, if they form part of a ‘series’.
The Supreme Court said in its 2023 decision Chief Constable of Northern Ireland Police v Agnew (available here) that what amounts to a series of deductions is a question of fact. It said ‘all relevant circumstances must be taken into account, including, in relation to the deductions in issue: their similarities and differences; their frequency, size and impact; how they came to be made and applied; what links them together, and all other relevant circumstances’.
The Supreme Court also made clear that a series of deductions will not automatically be broken just because there is a gap of more than three months between payments or a correct payment between two incorrect payments (overturning the EAT’s decision in Bear Scotland Ltd v Fulton) .
That said, how far workers can go back in time to find unlawful deductions, is limited by the Deductions from Wages (Limitation) Regulations 2014 which restricts claims for unlawful deductions to two years before the last deduction.
Facts: The employees were British Airways cabin crew. They were paid a basic salary, and received various allowances on top of this. British Airways did not include all of these allowances in the calculation of holiday pay. The employees complained that that they should be as they made up part of their ‘normal pay’. One of the most controversial allowances was a meal allowance which was paid at a very generous flat rate (which the employees acknowledged exceeded the cost of the food).
A number of employees brought Tribunal claims for unlawful deductions from wages. They argued, in particular, that the meal allowance was directly and intrinsically linked to the the performance of their contractual duties and should be included in their holiday pay.
Tribunal decision
The Tribunal concluded that the meal allowance, or a portion of it, should be included in the calculation of normal pay for holiday pay. (The portion not included would be categorised as an expense payment). The allowances were ‘intrinsically linked’ to the performance of duties and British Airways hadn’t been able to show they were not.
The Tribunal said that each time the allowance was not paid as part of holiday pay was an unlawful deduction. However, any series formed by these deductions was broken by a gap of more than three months between two successive deductions (as the claim was heard before the Supreme Court’s decision in Agnew).
Both parties appealed.
EAT decision
In respect of the inclusion of the meal allowance, the EAT said it was not up to employers to show that an allowance was not linked to the performance of duties. This was the Tribunal’s role which should carry out a sufficiently detailed analysis to decide if the allowance was intrinsically linked to the performance of the duties (and therefore normal pay) or an occasional expense. It was not possible to split the payment into two pots: it either fell on one side of the line or the other. The EAT returned this issue to the Tribunal to reconsider.
The Tribunal’s decision that any gap of three months or more between deductions would break the series was wrong. The Supreme Court’s decision in Agnew mean that this was no longer the case.
In respect of the series, the EAT said that it was not only formed by the deduction of meal allowances, it could also include all other allowances that were sufficiently linked to the performance of duties. This was because they were all of ‘sufficient’ similarity, as they all related to holiday pay and had all occurred because British Airways had failed to treat them as normal pay (even despite some difference in detail).
However, the question of whether there was a sufficient connection in time between the deductions to amount to a series was remitted to a new Tribunal to determine. Also, despite the series not being automatically broken by gaps of three months or more, there could still have been gaps long enough to break it. However, the EAT noted that when looking at the time-gap issue, tribunals should bear in mind that the purpose of the legislation is to protect vulnerable workers and that there will always be gaps in time between periods of holiday (and therefore between holiday pay payments).
Implications: This is a good reminder that gaps of three months or more between deductions will not necessarily break a series of deductions. Further, it is up to the Tribunal to determine whether the relevant allowances are sufficiently linked so as to form a series for holiday pay purposes and/or whether that series is broken.
That said, this decision is also a warning to employers of the difficulties in arguing that deductions are not sufficiently similar to form a series. In this case it was enough that they were all deductions related to holiday pay. Further, given the EAT’s comments in respect of the inevitability of gaps between holiday payments, it is likely that employers will find it hard to argue that gaps between payments mean that they don’t form a series (or that it is broken). Unless, for example, there are two quite random underpayments.
Finally, there is some good news, in that the EAT did say that it is not up to an employer to show that a payment (which an employee argues should be included in holiday pay) is not sufficiently linked to the performance of duties. This is for the Tribunal to decide.
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