British Airways plc v Williams and others

The Supreme Court considered the effect of article 7 of Council Directives 93/104/EC and 2003/88/EC and clause 3 of the European Agreement annexed to Directive 2000/79/EC (the Aviation Directive) as interpreted by the Court of Justice (Case C-155/10) on the meaning and calculation of "paid annual leave" under the Civil Aviation (Working Time) Regulations 2004. The Court of Justice held that paid annual leave must preserve not only basic salary but also components of remuneration intrinsically linked to the performance of contractual tasks and elements relating to personal and professional status; components intended exclusively to cover occasional or ancillary costs need not be included.

The Supreme Court rejected British Airways' argument that the domestic Aviation Regulations were too uncertain to implement the Directive and that only primary legislation could supply a representative-reference-period scheme. The Court held that, in the first instance, the employer may choose a reference period within parameters that can reasonably be judged to be representative; failing such a choice, the employment tribunal may make its own assessment. The Court remitted the pilots' claims to the Employment Tribunal to (a) determine a representative reference period and assess which pay components fall within the Directive's requirements and (b) decide whether any part of the Time Away From Base allowance (TAFB) was intended exclusively to cover costs and therefore excluded from holiday pay.

The appellants were airline pilots employed by British Airways under a collective Memorandum of Agreement (MOA) providing fixed annual sums plus flying-related supplements: a Flying Pay Supplement (FPS) and a Time Away From Base allowance (TAFB). The pilots contended that, for paid annual leave under the Aviation Regulations (regulation 4), holiday pay should include not only basic pay and FPS but also 18% of TAFB. British Airways contended that the Aviation Regulations did not sufficiently implement the Aviation Directive and that TAFB was an exclusive cost reimbursement and should be wholly excluded.

The Supreme Court previously referred questions to the Court of Justice on the nature and assessment of "paid annual leave". The Court of Justice (Case C-155/10) answered that paid annual leave requires maintenance of basic salary and pay components intrinsically linked to contractual tasks and professional status, and that national courts must assess whether various pay components meet those criteria using an average over a representative reference period; components intended exclusively to cover occasional ancillary costs need not be included.

On return from the Court of Justice, parties disputed consequences. The issues before the Supreme Court were (i) whether the Aviation Regulations could be interpreted as giving domestic effect to the Aviation Directive despite not containing a detailed calculation scheme, (ii) who should choose the reference period and how, and (iii) whether TAFB was "intended exclusively to cover costs" and so excluded from holiday pay.

The Court held (i) the Aviation Regulations, which adopt the Directive's language, could be interpreted in conformity with the Directive as explained by the Court of Justice and thus have domestic effect; (ii) the choice of a representative reference period is initially for the employer to make within reasonable parameters, and if the employer fails to choose the tribunal may determine a representative period and award appropriate payments under regulation 18; and (iii) whether TAFB is exclusive cost coverage is a matter of fact and intention to be determined by the employment tribunal, focusing on whether payments were genuinely and exclusively intended to meet costs rather than on third-party tax treatment or on a detailed reasonableness calculus. The Court therefore remitted the claims to the Employment Tribunal for assessment.

Appeal allowed in part. The Supreme Court held that the Court of Justice's interpretation of article 7/ clause 3 applies to the identical wording in regulation 4 of the Civil Aviation (Working Time) Regulations 2004; the regulations are sufficiently certain to have domestic effect and to be construed in conformity with the Directive. The choice of a representative reference period is initially for the employer to make within parameters that can reasonably be judged to be representative; failing that, the employment tribunal may determine the period and assess which components of pay must be maintained during annual leave. Whether TAFB is "intended exclusively to cover costs" is a factual question for the employment tribunal and should be remitted for determination.

On appeal from the Court of Appeal [2009] EWCA Civ 281. The Supreme Court made a preliminary reference to the Court of Justice (Case C-155/10), which issued its ruling on 15 September 2011 ([2012] ICR 847). The case returned to the Supreme Court, which gave judgment on 17 October 2012 remitting the claims to the Employment Tribunal for further determination.