Companies should consider intention behind allowances after Supreme Court ruling on holiday pay says expert

Out-Law News | 22 Oct 2012 | 11:12 am | 2 min. read

Employers must consider the intention behind payments made on top of an employee’s basic pay following the Supreme Court’s ruling that pilots should be paid their “normal remuneration” during their four weeks’ statutory annual leave, an expert has said.

Sean Connolly of Pinsent Masons, the law firm behind Out-Law.com, said that allowances designed to cover “costs or expenses” would likely not be caught by the ruling. However “contractually required” allowances, such as a London living allowance or shift allowances, may now need to be included in holiday payments, he said.

“If, as a general rule, these expenses would not be incurred during a period of holiday, they should not be paid as part of holiday pay,” he said. “However, where an allowance is paid as part of the work that is contractually required, this might still need to be included.”

“It may be that workers will argue that allowances, bonuses and commission payments are payable as part of holiday pay, particularly where it can be argued that these are contractual rather than discretionary payments,” he added.

In the Supreme Court case (29-page / 132KB PDF), a group of British Airways pilots had argued that their holiday pay should include two supplements contained in their terms of employment: a ‘flying pay supplement’ of £10 per flying hour, and part of a ‘time away from base’ allowance that covered meals and other costs. Pilots are taxed on 18% of this second payment as HM Revenue and Customs (HMRC) considers the balance reflects out of pocket expenses.

The judges had previously referred questions about the definition of ‘paid annual leave’ to the Court of Justice of the European Union (CJEU), which decided that holiday pay should put a worker in a financial position which was comparable to periods of work. The CJEU said that paid annual leave should include payment for tasks that the employee was contractually required to perform, but not payments which were “intended exclusively to cover occasional or ancillary costs”. Although it was for the national courts to determine which category a particular payment fell into, the assessment must be carried out on the basis of "an average over a reference period which it judged to be representative", it said.

Although the case concerned pilots’ annual leave, as governed by the Civil Aviation (Working Time) Regulations, Connolly said that the ruling could have implications for other workers, whose holiday entitlement is governed by the Working Time Regulations. Supplementary payments, such as those claimed by the pilots, are particularly common in the infrastructure sector, he said.

However some implications of the decision remained unclear, particularly with regards to private sector employers, he added.

“Following this decision, if an employer excludes payments from holiday pay that are usually paid as part of normal remuneration such as bonuses, commission payments and particularly allowances, this could potentially be a breach of the [Working Time] Directive,” he said. “However, private employers may still be able to rely on the narrower definition of pay in the WT Regulations and Employment Rights Act that does not appear in the Civil Aviation Regulations. It remains to be seen whether the courts will continue to apply the narrower definition of holiday pay in the domestic legislation or to interpret this more widely following this decision.”

The Employment Tribunal will now consider the appropriate payment to be made to the pilots in to cover periods of paid annual leave.