Factual and Procedural Background
The appeals before the Employment Appeal Tribunal concern test cases on the calculation of holiday pay under the Working Time Regulations 1998 (WTR), which implement the Working Time Directive (WTD) within the United Kingdom. The Appellants include three companies engaged in construction and engineering work (referred to as Company A, Company B, and Company C), while the Respondents are groups of employees affected by the calculation of their holiday pay. The claims arose from Employment Tribunal decisions that found the employers had made unlawful deductions from wages by failing to include overtime and certain allowances in holiday pay calculations.
The appeal by Company A challenged a decision that it had unlawfully deducted wages by excluding overtime payments from holiday pay. Company B and Company C appealed against findings that they failed to include overtime in holiday pay and did not pay full contractual payments in lieu of notice (PILON). These appeals were heard together due to the common legal issues involved. The Secretary of State for Business, Innovation and Skills intervened in support of the Appellants. The case references the Supreme Court and Court of Justice of the European Union (CJEU) decisions on related issues, particularly the interpretation of Article 7 of the WTD concerning paid annual leave.
Legal Issues Presented
- Whether Article 7 of the Working Time Directive requires that payments for non-guaranteed overtime and similar remuneration be included in the calculation of holiday pay under the Working Time Regulations.
- Whether the domestic legislation (specifically Regulation 16 of the WTR and sections of the Employment Rights Act 1996) can be interpreted, pursuant to the Marleasing principle, to give effect to the requirements of Article 7 of the Directive.
- Whether underpayments of holiday pay constitute a "series of deductions" within the meaning of section 23(3) of the Employment Rights Act 1996, thereby affecting the time limits for bringing claims.
- Whether contractual payments for pay in lieu of notice (PILON) should include payment for a 44-hour week, including overtime, based on the construction of the relevant contractual provisions.
- Whether certain allowances—specifically Radius Allowance (RA) and Travelling Time Payment (TTP)—should be included in normal remuneration for the purpose of calculating holiday pay.
Arguments of the Parties
Appellants' Arguments
- Article 7 does not require holiday pay to include non-guaranteed overtime since the employer is not contractually obliged to offer such overtime.
- Non-guaranteed overtime differs from guaranteed overtime and should be excluded from normal remuneration for holiday pay.
- Including non-guaranteed overtime in holiday pay calculations would create undesirable incentives contrary to the health and safety purposes of the Directive.
- The Marleasing principle of conforming interpretation is limited and cannot justify an interpretation contrary to the clear domestic statutory scheme, as established in Bamsey and other authorities.
- Allowances such as RA and TTP are not intrinsically linked to work performance and relate to ancillary costs, thus should be excluded from holiday pay.
- Contractual provisions do not obligate the employer to provide overtime as part of normal working hours, so PILON should not include payment for 44 hours per week including overtime.
Respondents' Arguments
- Article 7 requires that holiday pay include non-guaranteed overtime and other components of normal remuneration received during the reference period.
- The CJEU decisions in Williams and Lock establish that remuneration must correspond to normal pay, including variable elements intrinsically linked to work.
- The domestic legislation can be interpreted conformingly to give effect to the Directive’s requirements, consistent with the Marleasing principle.
- Underpayments of holiday pay constitute a series of deductions, allowing claims beyond the usual three-month time limit.
- Contractual interpretation supports inclusion of 44 hours per week (including overtime) in PILON payments based on the working pattern agreed between parties.
- Allowances such as RA and TTP remunerate time spent travelling, which is intrinsically linked to work, and thus form part of normal remuneration for holiday pay.
Intervener's Arguments
- Supported the Appellants’ position that Williams did not concern overtime payments and that non-guaranteed overtime should not be included in holiday pay.
- Argued that the references to overtime in Advocate General opinions were limited and did not establish inclusion of non-guaranteed overtime in normal remuneration.
- Submitted that the Marleasing principle should be applied narrowly and not distort clear domestic legislation.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| British Airways plc v Williams [2011] UKSC 31 |
Interpretation of Article 7 WTD regarding inclusion of fixed and variable pay components in holiday pay. |
Used as foundational authority confirming that normal remuneration during annual leave must include payments intrinsically linked to work, including certain variable elements. |
| Lock v British Gas Trading Ltd [2014] ICR 813 |
Extension of Williams to commission payments; established that pay components intrinsically linked to work must be included in holiday pay. |
Confirmed the principle that remuneration linked directly to work must be included, reinforcing the interpretation of Article 7. |
| Bamsey and Others v Albon Engineering and Manufacturing plc [2004] ICR 1083 (CA) |
Definition of normal working hours and week’s pay under Employment Rights Act 1996 for holiday pay calculations. |
Held binding on interpretation of domestic legislation; distinguished guaranteed and non-guaranteed overtime in defining normal working hours. |
| Pfeiffer v Deutscher Rotes Kreuz Kreisverband Waldshut eV [2005] ICR 1307 |
Marleasing principle: national courts must interpret domestic law as far as possible in conformity with EU Directives. |
Applied to assess whether domestic legislation can be interpreted to give effect to Article 7 of the Directive. |
| Adeneler v Ellinkos Organismos Gallaktos (ELOG) [2006] IRLR 716 |
Limits on conforming interpretation including legal certainty and non-retroactivity. |
Considered in assessing boundaries of the Marleasing principle and interpretative obligations. |
| Tarmac Roadstone Holdings v Peacock [1973] ICR 273 |
Contractual interpretation of overtime obligations and inclusion in redundancy payments. |
Applied analogously to determine whether overtime formed part of normal working hours for PILON. |
| Lotus Cars Ltd v Sutcliffe and Stratton [1982] IRLR 381 |
Requirement that employer be obliged to provide overtime for it to count as normal working hours. |
Used to analyze contractual obligation to provide overtime in the cases before the court. |
| Robinson-Steele v R D Retail Services Ltd [2006] ICR 932 (CJEU) |
Definition of paid annual leave requiring maintenance of normal remuneration. |
Referenced to support interpretation of Article 7 and the concept of normal remuneration. |
| Stringer v Revenue and Customs Commissioners [2009] ICR 932 (CJEU) |
Clarified that holiday pay must correspond to normal remuneration without reduction. |
Supported the principle that workers must not suffer financial disadvantage during annual leave. |
| Ghaidan v Godin-Mendoza [2004] 2 AC 557 |
Limits on statutory interpretation under the Human Rights Act and comparison to Marleasing principle. |
Discussed in relation to the scope and limits of conforming interpretation of domestic law to EU Directives. |
Court's Reasoning and Analysis
The Court began by examining the meaning of Article 7 of the Working Time Directive and its interpretation in the CJEU decisions in Williams and Lock. It confirmed that the Directive requires that workers receive their normal remuneration during periods of paid annual leave, including variable pay components intrinsically linked to the performance of their contractual tasks. The Court rejected the Appellants’ argument that non-guaranteed overtime should be excluded, holding that where overtime is contractually obligatory for the employee if requested, even if not guaranteed by the employer, it forms part of normal remuneration.
Next, the Court considered whether domestic legislation, particularly Regulation 16 of the Working Time Regulations and relevant sections of the Employment Rights Act 1996, could be interpreted conformingly to give effect to Article 7 (the Marleasing principle). The Court acknowledged limitations on such interpretation but concluded that it was possible to construe the legislation in a way consistent with the Directive, even if this conflicted with previous case law such as Bamsey. It emphasized that the Regulations were enacted to implement the Directive and should be interpreted accordingly.
Regarding the issue of a "series of deductions," the Court analyzed the statutory language and purpose. It concluded that a series requires a sufficient factual and temporal link between deductions, and that a gap of more than three months between deductions breaks the series, limiting the period for bringing claims. The Court rejected the Employment Tribunal’s reasoning that employees have retrospective choice over which type of leave was taken.
On the contractual construction issue concerning PILON payments, the Court applied established principles from prior authorities (Tarmac Roadstone Holdings and Lotus Cars) and concluded that the contracts did not obligate the employer to provide a fixed 44-hour week including overtime. Thus, PILON payments should not be based on 44 hours per week.
Finally, the Court addressed whether certain allowances (Radius Allowance and Travelling Time Payment) are part of normal remuneration. It found that these payments remunerate time spent travelling to work, which is intrinsically linked to the work performed. Consequently, these allowances fall within the scope of normal remuneration for holiday pay purposes and must be included.
Holding and Implications
The Court held that Article 7 of the Working Time Directive requires that payments for non-guaranteed overtime must be included as part of normal remuneration in calculating holiday pay under the Working Time Regulations. It further held that domestic legislation can be interpreted conformingly to give effect to this requirement.
The Court allowed the appeals by Company B and Company C on issues relating to the time limits for claims (series of deductions) and the contractual construction of PILON payments, concluding that the three-month limitation period applies where more than three months elapse between deductions and that PILON payments do not include guaranteed payment for 44 hours per week including overtime.
The Court also allowed the cross-appeal by the employees regarding the inclusion of certain allowances (Radius Allowance and Travelling Time Payment) in normal remuneration for holiday pay, reversing the Employment Tribunal’s exclusion of these payments.
The appeal by Company A was dismissed in relation to the inclusion of overtime in holiday pay.
These decisions clarify the scope of holiday pay calculations under UK law in light of EU law, confirming that non-guaranteed overtime and certain allowances must be included in normal remuneration while maintaining limits on claims for deductions. The rulings do not create new precedent beyond the direct effect on the parties but provide authoritative guidance on the interpretation of the Working Time Regulations and related contractual provisions.