This summary is provided to assist in understanding the Court's decision. It does not form part of the reasons for the decision. The full judgment of the Court is the only authoritative document. Judgments are public documents and are available at: www.supremecourt.gov.uk/decided-cases/index.html

Michaelmas Term

[2012] UKSC 43

On appeal from: [2009] EWCA Civ 281

JUDGMENT

British Airways plc (Respondents)

v

Williams (Appellant) and others

before

Lord Hope, Deputy President; Lord Walker; Lord Mance; Lord Clarke; Lord Sumption

JUDGMENT GIVEN ON

17 October 2012

Heard on 23 July 2012

Appellant Jane McNeill QC, Michael Ford (Instructed by Thompsons Solicitors)

Respondent Christopher Jeans QC, Andrew Short QC(Instructed by Baker and Mackenzie LLP)

LORD MANCE (with whom Lord Hope, Lord Walker, Lord Clarke and Lord Sumption agree)

Introduction

1. By its judgment in this appeal dated 24 March 2010 the Supreme Court referred to the Court of Justice five questions regarding the nature and assessment of the concept of "paid annual leave" in articles 7 of Council Directives 93/104/EC and 2003/88/EC and clause 3 of the European Agreement annexed to and intended to be implemented under Council Directive 2000/79/EC. The Court of Justice by its judgment dated 15 September 2011 gave its response: British Airways plc v Williams (Case C-155/10) [2012] ICR 847. The parties are now at odds as to its consequences for the dispute between them.

1. Clause 3 of the European Agreement reads:

"(1) Mobile staff in civil aviation are entitled to paid annual leave of at least four weeks, in accordance with the conditions for entitlement to, and granting of, such leave laid down by national legislation and/or practice.

(2) The minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated."

1. In the United Kingdom, The Civil Aviation (Working Time) Regulations 2004 (SI 2004/756) ("the Aviation Regulations") were introduced to comply with this country's obligations to give effect to Directive 2000/79/EC. The Aviation Regulations provide:

"4. (1) A crew member is entitled to paid annual leave of at least four weeks, or a proportion of four weeks in respect of a period of employment of less than one year.

(2) Leave to which a crew member is entitled under this regulation-

(a) may be taken in instalments;

(b) may not be replaced by a payment in lieu, except where the crew member's employment is terminated."

1. As the Supreme Court explained in its judgment dated 24 March 2010 the Aviation Regulations are part of a wider complex of legislation requiring paid annual leave, starting with a general requirement introduced by Directive 93/104/EC ("the Working Time Directive"). The Working Time Directive excluded various sectors, including air transport. Further, when the Working Time Directive was implemented by the Working Time Regulations 1998 (SI 1998/1833) ("the Working Time Regulations"), these made specific reference to sections 221 to 224 (and by implication sections 234 to 235) of the Employment Rights Act 1996, which contain a detailed scheme (originally introduced in the context of redundancy pay) for ascertaining a week's pay in the cases of employments with and without "normal working hours". In contrast, the Aviation Regulations neither contain nor refer to any such scheme. They leave the concept of "paid annual leave" undefined. Hence, the issues arising in this appeal.

1. The appellants are British Airways pilots. Their terms of employment, negotiated by their union, British Air Line Pilots Association ("BALPA"), are found in a Memorandum of Agreement ("MOA") which requires them to take 30 days' annual leave and entitles them to take a further two weeks' leave, save in the case of pilots with a Gatwick base, who are obliged to take 35 days' holiday and are entitled to a further seven days of leave. The MOA provides for pilots to receive (a) a fixed annual sum, plus two supplementary payments varying according to the time spent flying, consisting of (b) the Flying Pay Supplement ("FPS") paid at £10 per flying hour and (c) the Time Away from Base allowance ("TAFB") paid at £2.73 per hour. British Airways explains that TAFB was "introduced to replace meal allowances, sundries and the Gatwick Duty Allowance" and to be "increased in accordance with the UK Retail Prices Index for Catering – Restaurant Meals". Her Majesty's Revenue and Customs' attitude is that the TAFB is over-generous and that 18% of it is taxable, in effect as pure remuneration.

The history of the case to date

1. When the appeal first came before the Supreme Court, British Airways' primary submission was that the United Kingdom legislator, by omitting to introduce any detailed scheme for the calculation of "paid annual leave" like that provided under the Working Time Regulations, must be taken to have left this to be determined by collective or individual agreement between the parties, whatever might be the effect of the Aviation Directive. The Supreme Court was not at that time persuaded by this submission, and thought it likely to be possible to construe the Aviation Regulations to reflect what meaning the Aviation Directive might have. Hence, the reference made to the Court of Justice.

1. British Airways' second submission was that the Aviation Directive was to like effect, leaving the calculation of "paid annual leave" to collective or individual agreement between the parties. Its third submission, if this was wrong, was that the only constraint imposed by the Directive was that pay during annual leave must not be so low as to prevent or inhibit the taking of leave. Finally, it submitted that the fixed annual sum – (a) above – constituted the pilots' normal pay and was sufficiently comparable to remuneration received while working to satisfy the requirement for paid annual leave.

1. The questions referred to the Court of Justice by the Supreme Court were in these circumstances:

"(1) Under (a) articles 7 of Council Directives 93/104/EC and 2003/88/EC and (b) clause 3 of the European Agreement annexed to the Council Directive 2000/79/EC: (i) to what, if any, extent does European law define or lay down any requirements as to the nature and/or level of the payments required to be made in respect of periods of paid annual leave; and (ii) to what, if any, extent may member states determine how such payments are to be calculated?

(2) In particular, is it sufficient that, under national law and/or practice and/or under the collective agreements and/or contractual arrangements negotiated between employers and workers, the payment made enables and encourages the worker to take and to enjoy, in the fullest sense of these words, his or her annual leave; and does not involve any sensible risk that the worker will not do so?

(3) Or is it required that the pay should either (a) correspond precisely with or (b) be broadly comparable to the worker's "normal" pay?

Further, in the event of an affirmative answer to question (3)(a) or (b):

(4) Is the relevant measure or comparison: (a) pay that the worker would have earned during the particular leave period if he or she had been working, instead of on leave, or (b) pay which he or she was earning during some other, and if so what, period when he or she was working?

(5) How should "normal" or "comparable" pay be assessed in circumstances where: (a) a worker's remuneration while working is supplemented if and to the extent that he or she engages in a particular activity; (b) where there is an annual or other limit on the extent to which, or time during which, the worker may engage in that activity, and that limit has been already exceeded or almost exceeded at the time(s) when annual leave is taken, so that the worker would not in fact have been permitted to engage in that activity had he been working, instead of on leave?

1. The Court of Justice gave a compendious answer. It ruled (para 31) that article 7 of Directive 2003/88/EC and clause 3 of the European Agreement:

"must be interpreted as meaning that an airline pilot is entitled, during his annual leave, not only to the maintenance of his basic salary, but also, first, to all the components intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment and in respect of which a monetary amount, included in the calculation of his total remuneration, is provided and, second, to all the elements relating to his personal and professional status as an airline pilot. It is for the national court to assess whether the various components comprising that worker's total remuneration meet those criteria."

1. The Court of Justice's reasoning makes clear that it was ruling against British Airways on questions (2), (3) and (5)(a):

"20 The purpose of the requirement of payment for that leave is to put the worker, during such leave, in a position which is, as regards remuneration, comparable to periods of work …

21 … remuneration paid in respect of annual leave must, in principle, be determined in such a way as to correspond to the normal remuneration received by the worker. It also follows that an allowance, the amount of which is just sufficient to ensure that there is no serious risk that the worker will not take his leave, will not satisfy the requirements of European Union law."

1. The court went on, in further answer, to say that where, as here, pay was structured to involve several components, "a specific analysis" was required (para 22), because (para 23):

"that structure cannot affect the worker's right … to enjoy, during his period of rest and relaxation, economic conditions which are comparable to those relating to the exercise of his employment"

and

"24 Accordingly, any inconvenient aspect [sic] which is linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment and in respect of which a monetary amount is provided which is included in the calculation of the worker's total remuneration, such as, in the case of airline pilots, the time spent flying, must necessarily be taken into account for the purposes of the amount to which the worker is entitled during his annual leave.

25 By contrast, the components of the worker's total remuneration which are intended exclusively to cover occasional or ancillary costs arising at the time of performance of the tasks which the worker is required to carry out under his contract of employment, such as costs connected with the time that pilots have to spend away from base, need not be taken into account in the calculation of the payment to be made during annual leave.

26 In that regard, it is for the national court to assess the intrinsic link between the various components which make up the total remuneration of the worker and the performance of the tasks which he is required to carry out under his contract of employment. That assessment must be carried out on the basis of an average over a reference period which is judged to be representative and in the light of the principle established by the case law …, according to which Directive 2003/88 treats entitlement to annual leave and to a payment on that account as being two aspects of a single right...

27 That stated, it must also be pointed out that the court has already held that an employee, working as a purser for an airline company and transferred, by reason of her pregnancy, temporarily to ground work, was entitled, during her temporary transfer, not only to maintenance of her basic salary but also to pay components or supplementary allowances relating to her professional status as an employee. Accordingly, allowances relating to her seniority, her length of service and her professional qualifications had to be maintained: see, to that effect, Parviainen v Finnair Oyj (Case C-471/08) [2011] ICR 99; [2010] ECR I-6529, para 73. That case law also applies to a pregnant worker who has been granted leave from work: see Gassmayr v Bundesminister für Wissenschaft und Forschung (Case C-194/08) [2010] ECR I-6281, para 65.

28 It follows that, in addition to the components of the total remuneration set out in para 24 of the present judgment, all those which relate to the personal and professional status of an airline pilot must be maintained during that worker's paid annual leave."

1. The court ended its reasoning by repeating that "It is for the national court to assess whether the various components comprising that worker's total remuneration meet those criteria" (para 31). The court therefore drew a distinction relevant to TAFB between, on the one hand, remuneration, including remuneration based on personal or professional status, for all activities whether basic or "inconvenient" undertaken during employment (para 24) and, on the other hand, payments "intended exclusively to cover occasional or ancillary costs" (para 25) – costs which would not of course be incurred during holiday periods.

1. The court made clear in para 26 that it is "for the national court to assess" into which of the two categories identified in paras 24 and 25 any payment fell. When it went on in para 26 to state that "That assessment must be carried out on the basis of an average over a reference period which is judged to be representative", the most natural reading of the statement is that the court understood that this assessment was also something that the national court could and would judge for itself. The court's reasoning in para 26 further indicates that it contemplated an average over a reference period judged to be representative of "normal" working and remuneration, rather, therefore, than a calculation based on what the employee might have earned during the holiday period, had she or he then been working.

1. The concept of "a reference period … judged to be representative" recognises the exercise of judgment inherent in words like "representative" and "normal". The Court of Justice was not prescriptive as to what might or might not constitute a representative period. The court did not expressly address the question how far a member state or national court might adopt a standard period, applicable to a range of employees, like that required under sections 221 to 226 of the Employment Rights Act 1996. Different British Airways pilots may earn different supplementary amounts of FPS (or TAFB) according to their different flying patterns during different periods. This could no doubt be one factor to bear in mind in arriving at any reference period, whether for pilots generally or for a particular pilot. Further, the court did not specifically answer question (5)(b), which is potentially relevant since Regulation 9 of the Aviation regulations provides:

"in any month

(a) no person … shall act as a crew member during the course of his working time, if during the period of 12 months expiring at the end of month before the month in question the aggregate block flying time of that person exceeds 900 hours; and (b) no crew member employed by him shall have a total annual working time of more than 2,000 hours during the period of 12 months expiring at the end of the month before the month in question".

If a reference period of the previous 10 or 11 months at work were taken, a pilot might in that period have exhausted his or her permitted 900 hours. If an average is in such circumstances to be calculated including all 900 hours, the pilot would (as he or she arguably should) receive paid holiday pay higher than that receivable by a pilot who had only flown 800 hours in the same 10 or 11 months.

The current issues

1. In the light of the Court of Justice's judgment, the appellants submit that (i) each of their claims can and should now be remitted to the Employment Tribunal for assessment by that tribunal of a representative period and of the relevant remuneration earned during that period, and that (ii) such remuneration should include not merely basic pay and FPS, but also 18% of TAFB. British Airways, on the other hand, submits that (i) the Aviation Regulations are too unspecific to give effect to the Aviation Directive, in the absence of any relevant legislative scheme, and (ii) that the whole of the TAFB should be excluded from remuneration for the purposes of any calculation.

1. It is common ground that article 7 of the Aviation Directive does not have direct effect against British Airways. In Dominguez v Centre Informatique du Centre Ouest Atlantique (Case C-282/19) [2012] ICR D23, the Court of Justice treated the equivalently worded article 7 of the Working Time Directive as directly effective against the State. But British Airways is not an emanation of the State. Article 7 of the Aviation Directive can only therefore be invoked against British Airways if it has been effectively implemented at domestic level. In support of its first, general submission, British Airways thus argues that this has not occurred; that the concept of "an average over a reference period which is judged to be representative" is open- ended and so open to differing assessments that implementation of the Aviation Directive in national law requires legislation; and that the mere echoing in regulation 4(1) of the phrase "paid annual leave" which appears in article 7 is insufficient for effective implementation of the Directive.

1. At the European legal level, British Airways invokes the principle of legal certainty; at the domestic level, it submits that no possibility exists of "interpreting" the Aviation Regulations as implementing the Aviation Directive effectively, pursuant to the well-established duty to interpret domestic legislation so far as possible in a manner conforming with any obligations imposed by a Directive: see, inter alia, Marleasing SA v La Comercial Internacional de Alimentación SA (Case C-106/89)[1990] ECR I-4135 and Pfeiffer v Deutsches Rotes Kreuz, Kreisverband Waldshut eV (Joined Cases C-397-403/01) [2005] ICR 1307, paras 109-120. The impossibility of a conforming interpretation is reinforced, British Airways submits, by the consideration that the Merchant Shipping (Hours of Work) Regulations 2002 (SI 2002/2125), although not directly in issue, provide (in regulation 12) for the same entitlement to paid annual leave, but go on to provide not for civil liability, but for criminal liability in the event of any contravention of regulation 12. British Airways argue that the need for legal certainty and the obstacles to any form of interpretive solution are all the greater when the concept of "paid annual leave" has, albeit in the context of other Regulations, penal implications. British Airways invokes in this connection the principle that the interpretive obligation recognised in cases such as Marleasing should not be used with the effect of "determining or aggravating" domestic criminal liability: Criminal Proceedings against Kolpinghuis Nijmegen BV (Case 80/86) [1987] ECR 3969, para 14 and Criminal Proceedings against Arcaro (Case C-168/95) [1997] All ER (EC) 82, para 42.

1. British Airways notes that the present situation has only arisen because pilots have been successful in the Court of Justice in challenging the parties' collective agreement in the MOA, according to which basic pay was to be taken as the measure of paid annual leave and increments in basic pay were from time to time negotiated. Had the Court of Justice restricted the payment required during annual leave to basic pay or allowed the parties to do so, there would have been no problem in knowing what the Directive required or in giving effect to it at national level. As it is, however, British Airways submits, the requirements of the Directive, as explained by the court, require a detailed legislative scheme, which is not found in the Aviation Regulations and could not be supplied by an employment tribunal.

1. Finally, British Airways seeks to gain support for its case from the absence in regulation 18 of the Aviation Regulations of any explicit power in the employment tribunal to assess or award compensation for paid annual leave. That, British Airways submits, is precisely because no one conceived that paid annual leave could, under the Aviation Regulations, mean anything other than basic pay, as had been collectively agreed by the MOA. Now that it is clear that it means more, the absence of any such power confirms the absence of any legislative scheme regarding paid annual leave sufficient to implement the Aviation Directive or to have any domestic effect.

Analysis on issue of uncertainty and domestic effect

1. I do not accept British Airways' submissions. Their foundation is the open-endedness of the exercise of judgment inherent in the concept of "an average over a reference period which is judged to be representative". The domestic legislator may well have assumed, as British Airways submits, that the assessment of paid annual leave would be a simple matter, with any problems being resolved by collective agreement. The more sophisticated assessment now revealed to be necessary and the absence of any collective agreement leave scope for differences of view about the period to be taken. On the other hand, a general legislative scheme of the sort that British Airways maintains to be required could itself have risked being over- prescriptive. Be that as it may, the legislator chose in the Aviation Regulations simply to repeat the relevant language of the Aviation Directive. The Court of Justice having explained the principles behind article 7 of the Working Time Directive and clause 3 of the European Agreement, the same principles must be taken to have been intended to govern the same wording where it appears in regulation 4 of the Aviation Regulations.

1. The solution, in my opinion, is that, in these circumstances and in the absence of any other means of ascertaining a representative reference period, the choice of a reference period is in the first instance for British Airways to make. This is a choice to be made by British Airways within the parameters of what can (reasonably) be "judged to be representative". Failing such a choice, British Airways cannot complain if a court or tribunal takes its own view of what best represents a representative period in the case of an individual employee who brings a case to it. This in my opinion matches the Court of Justice's own expectations: see para 13 above. It would be surprising if domestic courts or tribunals were to conclude that they could not give effect to a domestic article using identical language to the Aviation Directive in the way in which the Court of Justice contemplated that the language of the Directive envisages. This is reinforced by the Court of Justice's conclusion that, in a context where the employer is the State, article 7 is directly effective (and so, by necessary implication, sufficiently certain for that purpose).

1. I am unimpressed by the submission that, on the basis that the same approach is to be transposed to the same language in the Merchant Shipping (Hours of Work) Regulations 2002, the result would be to expose employers to criminal liability for failing to make an appropriate choice within uncertain parameters. So long as an employer's choice is within those parameters, no problem arises, and, if a bona fide choice were to fall outside such parameters, the likelihood of a criminal prosecution would appear remote. If the problem were to prove a real one, then the difference between the present regulations and those imposing criminal liability might itself also require a different approach to the issue of enforceability if it arose in the latter context.

1. I am also unimpressed by the submission that regulation 18 militates against or prevents a conclusion that, in the absence of a choice by British Airways, the employment tribunal can make its own assessment of "an average over a reference period which is judged to be representative". Regulation 18 provides:

"Remedies

18.—(1) A crew member may present a complaint to an employment tribunal that his employer has refused to permit him to exercise any right he has under regulation 4, 5(1), (4), 7(1) or 7(2)(b).

(2) An employment tribunal shall not consider a complaint under this regulation unless it is presented—

(a) before the end of the period of three months beginning with the date on which it is alleged—

(i) that the exercise of the right should have been permitted (or in the case of a rest period or annual leave extending over more than one day, the date on which it should have been permitted to begin), or

(ii) the payment under regulation 4(2)(b) should have been made;

as the case may be; or

(b) within such further period as the tribunal considers reasonable in a case where it is satisfied that it was not reasonably practicable for the complaint to be presented before the end of that period of three months.

(3) Where an employment tribunal finds a complaint under regulation 4, 5(1), (4), 7(1) or 7(2)(b) well-founded, the tribunal—

(a) shall make a declaration to that effect; and

(b) may make an award of compensation to be paid by the employer to the crew member.

(4) The amount of the compensation shall be such as the tribunal considers just and equitable in all the circumstances having regard to—

(a) the employer's default in refusing to permit the crew member to exercise his right; and

(b) any loss sustained by the crew member which is attributable to the matters complained of."

1. British Airways' submission is that regulation 18(1) only contemplates complaints based on a refusal to permit an employee to take paid annual leave, not complaints about the level of payment for such leave. The only reference to a complaint based on failure to make a payment is in regulation 18(2)(a)(ii). There it is linked to a failure on termination of employment to make a payment in lieu of leave under regulation 4(2)(b), and that is a payment which is based necessarily on an assessment of what the employee would have earned during a defined period. British Airways contrasts this position with that under certain other regulations, such as the Working Time Regulations 1998. Regulation 16 of the Working Time Regulations entitles a worker to be paid at the rate of a week's pay in respect of each week of the annual leave required under regulation 13 and regulation 30 (Remedies) goes on specifically to deal in regulation 30(1)(a)(i) with refusal to permit a worker to exercise any right he has under regulation 13, and in regulation 30(1)(b) with failure "to pay him the whole or any part of any amount due to him under regulation …. 16(1)", while regulation 30(5) provides that, where an employment tribunal finds such a failure, "it shall order the employer to pay to the worker the amount which it finds to be due to him".

1. It is true that the Aviation Regulations, unlike the Working Time Regulations, do not explicitly address complaints relating to the payments for annual leave. But it is our duty to read the domestic Regulations so far as possible to give effect to the Aviation Directive, as interpreted by the Court of Justice. Regulation 18(1) contemplates complaints where an employer has refused to permit the exercise of any right that an employee has under regulation 4. Regulation 18(4) enables an employment tribunal to award such compensation as it "considers just and equitable in all the circumstances having regard to … the employers' default in refusing to permit the crew member to exercise his right". The concept of refusal to permit the exercise of a right can extend to cover refusal to permit the crew member an appropriate payment as part of the right to paid annual leave. The employment tribunal can on the like basis make such award as it considers just and equitable to compensate for such refusal.

1. The implication of British Airways' present submissions is that any complaint that a pilot might have can and would lie not against British Airways, but at most against the United Kingdom, for failure to implement the Aviation Directive effectively at the domestic level. I note that this would itself involve the pilot invoking a forum, presumably a court, which would then have to determine as against the State the appropriate parameters of a period judged to be representative of the pilot's normal pay – the very exercise that British Airways submits is so uncertain that it cannot be undertaken by the employment tribunal.

1. For the reasons I have given, I do not accept British Airways' submissions, and conclude accordingly that the claims should be remitted to the Employment Tribunal for further consideration of the appropriate payments to be made to the pilots in respect of the periods of paid annual leave in issue.

TAFB

1. The appellants submit that the Supreme Court can and should without more conclude that the pilots' remuneration includes 18% of the sums paid by way of TAFB. But the 18% is no more than the percentage which Her Majesty's Revenue and Customs regards as taxable. The Revenue's attitude for tax purposes is presently irrelevant. It amounts at best to a third party's view on an issue to be determined independently by the employment tribunal. Even if the Revenue's attitude for tax purposes were relevant, it is not in any event clear on what basis the Revenue arrived at its attitude, or by reference to what considerations.

1. In contrast, British Airways relies upon the test stated by the Court of Justice in its para 25, which excludes from remuneration relevant to the calculation of holiday pay, components of pay "which are intended exclusively to cover … costs". British Airways stresses the word "intended". Within such components, the Court of Justice expressly included "costs connected with the time that pilots have to spend away from base". The question arising is therefore whether the payments by way of TAFB were "intended exclusively to cover … costs". Although British Airways submits that the Supreme Court can or should itself determine the answer to this question, we do not have the material to do so in the agreed statement of facts or elsewhere. Even the history of TAFB given by British Airways as summarised in para 5 above is no more than its statement of the position. It must be for the employment tribunal to consider and determine upon what basis TAFB was agreed and paid during any relevant period.

1. As to the precise test, the concept "intended exclusively to cover … costs" requires attention to be focused on the real basis on which the TAFB payments were made. If they were payments that were made genuinely and exclusively to cover costs, that would, at least prima facie, be the end of the matter. The appellants' case appears to be that, although they were designated as being for the exclusive purpose of covering costs, they were in fact more than some or all pilots might actually need for or spend on costs, and that the Revenue has, in effect, seen through the description to a reality which the Supreme Court, or an employment tribunal, should also recognise.

1. As Mr Jeans QC for British Airways accepted, there could no doubt come a point at which it was obvious that payments nominally made to cover costs were not required, or were not going to be required, in their entirety, to match actual costs. An employer who in such circumstances continued to make such payments in their full amount could then no longer maintain that they were genuinely and exclusively intended to cover costs. But, in using the phrase "intended exclusively to cover … costs", it does not appear that the Court of Justice contemplated any detailed evaluation of the precise need for or reasonableness of payments which were so intended. What matters is whether there was a genuine intention in agreeing and making such payments that they should go exclusively to cover costs. It is on that the employment tribunal should in my opinion focus.

1. On this basis, I would also remit the issues relating to TAFB to the employment tribunal, together with those relating to paid annual leave to which para 27 above refers.