This is an appeal from the judgment given on 22 June 2005 by the Employment Appeal Tribunal (Burton J presiding) on two specimen cases brought against British Airways (BA) by two of its employees (the Claimants) about the rate of holiday pay for the statutory 4 week period prescribed by the Working Time Regulations 1998, as amended (the Regulations). The Claimants are Mr Andrew Noble, a baggage handler (or ramp agent), and Ms Margaret Forde, a customer service agent.

The outcome of the appeal directly affects about 9,000 fellow workers at BA and potentially affects many other workers entitled to statutory holiday pay. The calculation of holiday pay is something that every employer in the United Kingdom has to work out. There should be a simple way of doing it. Fortunately there is a short answer to the problem thrown up by this case, but unfortunately a rather long judgment is required to explain the route to what I think is the correct result.

The dispute centres on the shift element of pay and the relationship between the statutory method for the calculation of holiday pay and the contractual method for the calculation of holiday pay. The regime governing the calculation of pay for shift work is still contained in the provisions of collective agreements dating from the 1970’s. No distinction is made in the collective agreements between the calculation of shift pay for work periods and for holiday periods. At the time of the collective agreements holiday pay entitlement was purely contractual and it was usually for a shorter period than now exists.

The Claimants, like many administrativeand ground services staff at BA, work a variety of shifts (day, early, late, night, weekend) and the size of the shift payments varies depending on the shift worked. The pattern of shifts is determined by a 6 monthly roster, one for the summer and the other for the winter. The shifts to be worked are known a year in advance. Within the rosters there are different shifts. The employees receive, in addition to their basic pay, shift pay (sometimes called a “shift premium”) at a “Consolidated Rate” of shift pay (as will be explained below). In accordance with the shift pay arrangements negotiated in collective agreements for different categories of staff and incorporated in individual contracts of employment, BA calculates shift pay in a manner which is designed to achieve an even spread of payments, instead of individual payments of fluctuating amounts. The method involves the calculation of an average weekly figure, to which there is then applied an agreed multiplier of 48/52. The result is a weekly figure called the “Consolidated Rate” of shift pay. That is paid to the employee by BA way of shift pay for each week covered by the roster, irrespective of shifts actually worked by the employee in that week or of the employee actually being on holiday in that week.

The Claimants are entitled to 34 days of holiday with pay (26 days leave and 8 days in respect of public holidays). Until 1 August 2003 the paid holiday entitlement was entirely contractual. The Regulations did not apply to the air transportation sector: see regulation 18. Since 1 August 2003, however, the Regulations have applied to the Claimants and holiday entitlement has been partly statutory (20 days) and partly contractual (14 days). Under the Regulations the Claimants have a statutory right to be paid for 20 days on which they are not working, on shifts or otherwise. BA pays the Claimants the same amount of weekly pay for statutory holiday periods as it pays them for actually working.

The legal challenge is to the manner in which BA calculates the statutory annual holiday pay under the Regulations in those cases where the workers’ pay has a shift element. BA’s application of the Regulations to the calculations is disputed.

The Regulations must be interpreted, so far as is possible, to be consistent with the Council Directive 93/104/EC of 23 November 1993 (the directive), which is implemented by the Regulations and is now codified in Council Directive 2003/88/EC. The directive concerned certain aspects of the organisation of working time. Its purpose was to lay down minimum health and safety standards for the organisation of working time, including minimum paid annual leave of at least 4 weeks in accordance with conditions for entitlement laid down by national legislation and/or practice.

The essence of the Claimants’ case on the Regulations is that BA’s method of calculation does not comply with them, because the use of the multiplier 48/52 results in a reduction in the amount of the shift element in the holiday pay, which the Claimants are entitled to be paid. They do not, however, claim that they receive less shift pay for holidays than for shift work. The complaint is that, on the proper application of the Regulations, they should receive more shift pay for statutory holidays than they receive for work.

BA’s case is that it has fully complied with its statutory obligations by paying the same shift pay for holidays as for work. It has made the calculations in accordance with the Regulations and the Consolidated Rate and using the multiplier 48/52 in the manner stated in the collective agreements.

The Claimants won in the employment tribunal, as explained in the extended reasons sent to the parties on 2 November 2004. They were less successful in resisting BA’s appeal to the Employment Appeal Tribunal which, whilst dismissing BA’s appeal on liability, allowed its appeal on remedy.

Both sides were granted permission to appeal. BA appeals against the decision of the employment tribunal, which was upheld by the Employment Appeal Tribunal, on liability. The Claimants appeal against the decision of the Employment Appeal Tribunal on remedy.

The appeal on liability turns on the construction and application of two provisions: clause 16 in Appendix D of the A-scale Agreement and regulation 16 of the Regulations. The issue on liability is whether BA is in breach of its statutory duty under the Regulations by failing to calculate and pay the correct amount of holiday pay.

As to liability, BA emphasises that it has complied with its obligations under regulation 16 to pay the Claimants at the rate of a week’s pay in respect of each period of annual leave that they have taken since 1 August 2003. It paid the Claimants the same amount (ie a week’s pay, including the Consolidated Rate of shift pay) for every week of the year, whether they were at work or on leave. As there was no disparity between the rate of work pay and the rate of holiday pay, there was no financial disincentive to the Claimants taking paid leave. This is fully compatible with the health and safety purpose of the directive and the implementing Regulations.

The Claimants’ case on liability is that BA has not complied with the Regulations, because it has underpaid them in respect of the shift element of pay for the statutory holiday period and that in effect BA is requiring the Claimants to fund their own holiday pay entitlement at their expense.

The issue on remedy, which was raised by the Claimants for the first time in the Employment Appeal Tribunal and concerns apportionment between pay for statutory and contractual holidays, only arises on this appeal if BA is in breach of its statutory duty regarding holiday pay.

The relevant parts of the Regulations are referred to in the decisions of the employment tribunal and the Employment Appeal Tribunal. The following summary would, I think, be accepted by both sides as correct.

A worker is entitled under the Regulations to four weeks’ annual leave in each leave year: regulation 13(1). (A worker may, of course, be entitled to additional leave under contractual arrangements.)

A worker is entitled to be paid in respect of any period of annual leave to which he is entitled under regulation 13, “at the rate of a week’s pay in respect of each week of leave”: regulation 16(1). The Regulations are, of course, concerned with determining what a worker is entitled to be paid when he is on holiday, not with determining what he is paid when he is working, but the rate of a week’s pay for work determines what the worker is entitled to be paid in respect of each week of statutory leave.

For the purpose of determining “the amount of a week’s pay” in regulation 16 sections 221 to 224 Employment Rights Act 1996 (the 1996 Act) apply (with modifications): regulation 16(2).

Section 222 of the 1996 Act deals with remuneration varying according to time of work. It is common ground that it applies to the “Consolidated Rate” of shift pay, as agreed in the shift work provisions of the collective agreements. Section 222 provides that

According to section 222 (3)(a) the “average number of weekly hours” is calculated by dividing by 12 the total number of the employee’s normal working hours during the relevant period of 12 weeks.

According to section 222(3)(b) the “average hourly rate of remuneration” is the average hourly rate of remuneration payable by the employer to the employee in respect of the relevant period of 12 weeks.

The “relevant period of 12 weeks” means the period of 12 weeks ending, where the calculation date is the last day of a week, with that week, and otherwise, with the last complete week before the calculation date: section 222 (4).

A right to payment for statutory holiday pay does not affect a worker’s right to contractual remuneration: regulation 16(4).

Any contractual remuneration paid to a worker in respect of a period of leave goes towards discharging any liability to make statutory payments in respect of that period; and conversely, any payment of statutory remuneration in respect of a period goes towards discharging any liability of the employer to pay contractual remuneration in respect of that period: regulation 16 (5). In other words BA does not have to pay holiday pay twice over.

The individual contracts of employment incorporate provisions of collective agreements governing the calculation of the shift element in the amount of a week’s pay.

Clause 16 in Appendix D of the Administrative Staff (National Sectional Panel Agreement)- the A-scale Agreement- provides that

The total amount of shift pay due for each shift pattern is calculated by adding up the number of each shift type occurring Monday to Friday in the shift pattern and multiplying by the relevant payments set out in Appendix ‘B’;

To this is added the number of shifts which occur at the weekend multiplied by the relevant payments as set out in Appendix ‘B’;

The total amount of shift pay for the roster pattern is then divided by the number of weeks in that pattern. This weekly sum is then multiplied by 48 and divided by 52 to produce the weekly payment.

Duty relief shifts will be paid as follows:- the consolidated shift premium will be calculated (as in 16a-c) using the early/late premium for any duty relief shifts. As well as this, the actual shifts worked as duty relief shift will be calculated and any shifts that attract a higher premium than the early/late premium will be paid as a payment equal to the difference between the early/late premium and the premium for the shift worked.”

The employment tribunal found (see paragraph 34 of the extended reasons) that the figure 48 in the calculation referred to a number of weeks in a working year and the figure 52 to the total number of weeks in a year. There has been no appeal against that finding.

The multiplier 48/52 in clause 16 (c) is at the heart of the dispute as to the correct rate of a “week’s pay” in accordance with regulation 16 and section 222 of the 1996 Act. BA contends that the “Consolidated Rate” is the correct rate for the calculation of shift element of pay for work and holiday, whereas the Claimants contend that the correct rate is the “Consolidated Rate” but without the 4/52 reduction (sometimes described as the “unreduced rate”).

The same regime for the calculation of the Consolidated Rate of shift pay is contained in the Ground Services Staff (GSS) Agreement.

The employment tribunal, in dealing with a number of preliminary issues arising on the Regulations on the basis of a Statement of Agreed Facts, concluded that the Claimants had not been paid by BA in accordance with regulation 16 at the rate of “a week’s pay in respect of” each period of annual leave that they had taken since 1 August 2003.

The conclusion is explained at the end of paragraph 34 of the extended reasons-

BA’s criticism of the employment tribunal’s reasoning quoted in paragraph 23 above was rightly accepted by the Employment Appeal Tribunal. The employment tribunal had misconstrued the expression “in respect of each week of leave” in regulation 16(1). It read it as requiring either that the week’s pay must be paid in the week of the holiday or must be allocated to the period of the holiday. In fact all that is required by the language of regulation 16(1) is that there has been payment for each week of holiday of the amount of pay which the worker is entitled to be paid for the weeks when he is working: see paragraphs 15 and 16 of the judgment of the Employment Appeal Tribunal.

Although an error of law in the decision of an employment tribunal would normally lead to an appeal being allowed, the Employment Appeal Tribunal went on to dismiss the appeal on liability, as it accepted the Claimants’ arguments on construction of the Regulations.

Having detected an error of law in the employment tribunal’s decision, the Employment Appeal Tribunal ruled in favour of the Claimants on liability by applying the approach laid down in cases of “ rolled up holiday pay”-

The reasoning was amplified by reference to the authorities on “rolled up holiday pay” which are discussed in the judgment and are referred to later in this judgment. The point developed in the decision of the Employment Appeal Tribunal was that BA was not complying with the Regulations because, in its view, BA was reducing the sums payable in respect of shifts worked by applying the fraction 48/52 mentioned in clause 16 (c) of the collective agreement. As it said at the end of paragraph 20

The Employment Appeal Tribunal pointed out that there was in fact no material payment being made for shifts during four weeks out of 52 (paragraph 21) and that the contractual rate of pay was arrived at by calculating what was otherwise payable in respect of shift work and then reducing it by applying the formula of 48/52 (paragraph 22). It went on to hold that the fact that this arrangement had been in force for nearly 30 years before the imposition of the Regulations made no difference to the application of the Regulations or to the fact that it offended against them (paragraph 23). On that basis the Employment Appeal Tribunal considered the question of remedy, having rejected Mr Hogarth’s submission that the effect of the Regulations was to render void the reduction by the multiplier 48/52 in clause 16 (c) of the collective agreement.

The essence of the decision on liability was therefore that the contractual arrangements including a provision for a discount of 4/52 from the calculated total of shift pay, which is then paid proportionately throughout the year, resulted in an underpayment in respect of holiday pay in breach of regulation 16 of the Regulations. Payment throughout the year at the same rate had been secured by reducing the rate otherwise payable. As in “rolled up holiday pay” cases, where the tribunal had to be satisfied that full payment for holiday periods is included in payment for the rest of the year, so in this case the tribunal had to be satisfied that there is no reduction in the rate paid throughout the year to fund the payment for the statutory holidays. The 48/52 proportionate reduction did have the latter effect.

At the request of the court for a very simple hypothetical worked example Mr Hogarth illustrated his argument on liability, as summarised in paragraphs 33 below, by taking the case of an employee, who works a variety of shifts, for which the shift pay averages out at £75 a week.

Mr Hogarth then says that when the shift pay is annualised by multiplying £75 by 52 the result is the figure of £3,900 for shift payments. In calculating holiday pay BA multiplies £3.900 by 48/52 (ie omitting 4 weeks holiday in the calculation). The use of the multiplier reduces the annualised figure to £3,600. Averaged out over a year that produces a reduced weekly sum of £69.23. That is the sum wrongly used by BA for calculating the shift element of holiday pay.

Mr Hogarth submits that in his hypothetical example the correct weekly sum, which should be reflected in the shift element of holiday pay, is the sum of £75 that was earned. BA would not pay that sum as the holiday pay. It would only pay the reduced figure of £69.23 in respect of the holiday period. The effect of the reduction in the case of the Claimants (and others in a similar position) is that BA is forcing its employees to fund at their own expense BA’s statutory obligation to comply with the Regulations.

Mr Hogarth focussed on section 222 of the 1996 Act, which was accepted as the correct section to use, pointing out that many employees receive their pay in a different pay period to the one in which the work was performed and that the distinction between when the wages are earned and when they are paid is recognised in section 222. He submitted that section 222(2) and (3)(b) defined “a week’s pay” by reference to when the wages are earned and not when they are paid. The timing of the payment was not important.

The response of Mr Jeans for BA was that, as agreed in the collective agreements, BA calculates the amount of weekly pay actually payable for shift work by using the agreed multiplier of 48/52. That produces the “Consolidated Rate” of shift pay, which is the correct figure for shift work actually payable each week that the employee is working. It is also the correct rate to apply under regulation 16 and section 222 of the 1996 Act in calculating a week’s pay. It is therefore the amount to which the employee is entitled to be paid when he is on holiday.

In other words there is no incorrect reduction by BA in the shift pay element during the holiday period. The holiday pay is the same as the work pay. The Regulations require BA to pay the same rate in respect of each week of statutory leave as for each week of work. BA has complied with this obligation. Its employees are not deterred by any pay differential between holiday pay and work pay from taking their statutory holiday. There is no case for saying that the calculations are against the purpose of the directive and the Regulations to promote the health and safety of workers by their taking paid holidays. In these circumstances the question of remedy and apportionment dealt with by the Employment Appeal Tribunal in its judgment does not arise.

In my judgment, BA’s submissions on liability should be accepted. The “reduction” or discount in shift pay relied on by the Claimants is not the result of BA misapplying the Regulations or the collective agreements. The multiplier which results in the payments earned for shift work in 48 weeks being spread over the 52 weeks of the year is built into the agreed Consolidated Rate formula for the calculation of shift pay contained in the collective agreements and incorporated into individual contracts of employment. The real cause of complaint by the Claimants is the agreed method for calculating the Consolidated Rate rather than BA’s use of that method in the application of the Regulations.

A disaffected employee might regard the continued application of the Consolidated Rate to a situation in which there are longer periods of paid holidays and a wide range of changes in the terms of employment as a disincentive from doing shift work or from working for BA, but he could not regard it as a disincentive from taking the statutory paid holiday entitlement. BA’s employees are paid the same rate for shift pay, whether they are at work or are on holiday. They are no worse off as a result of taking paid holidays. BA accordingly complies with the policy of the directive that employees should be encouraged to take their holiday entitlement. BA uses an agreed method for calculating shift pay which ensures that they are paid the same when they are on holiday as when they are at work.

I took the view at the hearing of this appeal that the “rolled up holiday pay” cases, which had not been cited to the employment tribunal but were relied on in the Employment Appeal Tribunal, did not assist.

The Claimants are paid for specific identifiable holiday time. Identifiable shift pay is paid whilst the Claimants are on holiday and it is in the same amount as if they were at work. There is no question in this case of “rolled up holiday pay” as I understand the expression (which is not found in the legislation) used to describe pay arrangements in recent cases, such as MPB Structures Ltd v. Munro[2004] ICR 430,Smith v. AJ Morrisroes &Sons Ltd [2005] ICR 596 and Marshalls Clay Products Ltd v. Caulfield [2004] ICR 1502.

In the last mentioned case the Court of Appeal made a reference to the Court of Justice. Its ruling was handed down on 16 March 2006 (as part of the judgment reported under the name of the lead case Robinson Steele v. RD Retails Services Ltd C-131/04 and C-257/04) after the oral hearing of this appeal was over. The court granted the parties leave to make written submissions, which we have received and considered.

In his written submissions Mr Hogarth contended that the ruling of the Court of Justice dealt directly with the issues in the instant appeal in terms which meant that BA’s appeal on liability must be dismissed. He requested the court to re-list the case to hear the Claimants’ cross appeal on the remedy and apportionment point.

I am unable to accept Mr Hogarth’s reading of the judgment of the Court of Justice or his submissions on its impact. The context of the ruling of the Court of Justice was the regime of “rolled up holiday pay” which was described as “payment for annual leave by including the remuneration for that leave in the hourly or daily remuneration”: see paragraph 2 of the Court’s judgment.

As the Court of Justice pointed out (paragraph 49) the holiday pay required by the directive “is intended to enable the worker actually to take the leave to which he is entitled.” For the duration of annual leave “remuneration must be maintained. In other words, workers must receive their normal remuneration for their period of rest” (paragraph 50) The effect of the directive was to preclude part of the remuneration payable to a worker for work done from being attributed to payment for annual leave without the worker receiving a payment additional to that for work done.

Mr Hogarth submitted, however, that the Court of Justice had ruled (in paragraphs 47 to 52 of the judgment) that all forms of holiday pay, not just “rolled up holiday pay,” must be a genuine addition to the remuneration a worker earns for the work which he does and that, if they do not, the holiday pay does not comply with the directive.

This submission ignores the difference between the contractual arrangements in this case and the contractual arrangements in the “rolled up holiday pay” cases. In the “rolled up holiday pay” cases, although employees are entitled to paid holiday pay and a specific part of the wages represents holiday pay, the contractual scheme does not identify pay in respect of any specific period of statutory holiday. It is not possible to distinguish holiday periods at all. The issue is then whether holiday pay has been paid to the employees at all. Employees are paid for the hours or days that they are at work in a year. The employer has enhanced the ordinary rate of pay for work spread over the year to reflect and compensate for holiday pay. The question is whether there is, in such circumstances, a “true addition” to the contractual rate of pay and whether it is possible to identify a specific and additional element in the pay package of the employee which actually relates to holiday.

The approach of the Employment Appeal Tribunal was to assimilate this case to the “rolled up holiday pay” cases, to hold that the burden was on BA to show a “true addition” and to conclude that it was not satisfied, as the effect of the 4/52 reduction was to spread over 52 weeks shift pay that would otherwise have been payable only in respect of 48 weeks.

In my judgment, the “rolled up holiday pay” arrangements are not in point. BA has simply paid the same amount in respect of shift pay both for specific identified holidays and for work. That complies with the requirements of the Regulations. What the Claimants are seeking is enhanced shift pay for the holiday period, as compared with the shift pay for work. That is not required by the Regulations. The spreading of shift pay to produce a Consolidated Rate is produced by the correct application of the shift pay provisions in the collective agreement, not by a misapplication of the Regulations contrary to the health and safety purpose of the directive.

In my judgment, nothing in the ruling of the Court of Justice alters that position. Mr Hogarth cited the terms of the ruling in paragraph 52 of the judgment and the conclusion of the Court of Justice as extending to this case :

The ruling clearly applies to a contractual arrangement for remuneration in which pay for annual leave is rolled up with pay for work done. There is no such arrangement in this case. Where pay for annual leave is not rolled up with pay for work done and a week’s shift pay for annual leave is the same as a week’s shift pay for work done there is no requirement in the Regulations that a worker should receive an additional contractual payment increasing the amount of holiday pay.

For the reasons given above there is an error of law in the decision of the employment tribunal. I would allow BA’s appeal and set aside the orders of the employment tribunal and of the Employment Appeal Tribunal.

The issue on remedy and apportionment raised in the Claimants’ appeal does not arise. I would dismiss it.

I agree.

I also agree.