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On 16 March 2006, the European Court of Justice, in considering a number of issues referred to it by UK courts, ruled that the practice of paying "rolled-up holiday" is not permitted under the provisions of the European Working Time Directive. The court agreed, however, that payments already made in this way may be offset against an employer's liability to pay holiday pay at the time it is taken.
Background
Payment of "rolled-up holiday" is common in the employment of temporary, casual staff and agency staff, although it is also used for some permanent full-time workers with complex shift patterns. It involves the payment of holiday pay in instalments throughout the year rather than at the time that holiday is taken.
The practice has been unlawful in Scotland since 2002, when the Edinburgh Employment Appeal Tribunal (EAT) decided that it was inconsistent with the requirements of the European Working Time Directive (WTD) and the UK's implementation of that Directive in the Working Time Regulations 1998 (WTR). The EAT's view, subsequently confirmed by the Scottish Court of Session (Scotland's Appeal Court), was that holiday leave and pay is a single entitlement and that payment must be made at the time the holiday is taken. (MPB Structures Limited v Munro, April 2003)
In the rest of the UK, however, decisions of Employment Appeal Tribunals have concluded that the practice is not inconsistent with the WTD and the WTR as long as the arrangements are "transparent", i.e. they are set out clearly in employment contracts and the amount paid in respect of holidays is itemised. In addition, employers should take practical steps to ensure that workers actually take their holidays. (Smith v Morrisroes & Sons Ltd, November 2004)
There have, nevertheless, been a number of challenges to the legality of rolled-up holiday pay and, during 2004, several cases were referred to the European Court of Justice (ECJ).
In March 2004, the case Robinson-Steele v R D Retail Services Ltd was referred to the ECJ by an employment tribunal sitting in Leeds. It involved a shop fitter who worked for the employer between April 2002 and December 2003. He was paid weekly and his pay included a percentage of "rolled-up" holiday pay. As set out in his terms of engagement, "payment in respect of the entitlement to paid leave shall be made together with and in addition to the Temporary Worker's hourly rate at 8.33% of his hourly rate". During the period of employment, he took only two days' leave at his own request. His complaint was that he had not taken any more holiday leave because it would not have been paid for at the time he would have taken it. The tribunal, faced with contradictory decisions of the Scottish and English EATs, decided that it preferred the Scottish EAT's interpretation of the WTR, i.e. that rolled-up holiday pay is unlawful, and referred a number of specific questions to the ECJ.
In April 2004, the Court of Appeal referred two cases to the ECJ, Caulfield and Others v Marshalls Clay Products Ltd and Clarke v Frank Staddon Ltd. In the Marshalls Clay case, the employer and trade union introduced rolled-up holiday pay under a joint agreement that applied to shift workers. In the Frank Staddon case, Mr. Clarke's rate of pay did not increase when the rolled-up holiday agreement was introduced on the basis that it was already included in the daily rate of pay. In both cases, the EAT decided that the arrangements were lawful. The Appeal Court's view was that both EAT decisions did not conflict with the WTD or WTR. However, unhappy that such a decision would mean that the two national appeal courts, the Court of Appeal and the Court of Session, had come to contradictory conclusions on the same issues, the Appeal Court decided also to refer a number of questions to the ECJ.
A preliminary Opinion on the case, given an Advocate General in October 2005 to guide the ECJ's decision, proposed that the ECJ could approve the practice if provisions exist to ensure that workers are actually able to take their full leave entitlement. The conditions are that
- the amount included in the pay for the period that represents holiday pay should be clear to the worker - an issue already addressed in the EAT guidance that the practice should be "transparent", and
- the agreement must guarantee "the effective possibility" of a worker being able to take the minimum leave entitlement, in other words that the deterrent nature of paying holiday pay in instalments is overcome in some other way - an issue that is not satisfactorily addressed in the EAT guidance.
The legislation
The provisions of the Working Time Directive that are relevant to the practice of paying rolled-up holiday pay are:
- "Member States shall take the measures necessary to ensure that every worker is 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.
The minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated." (Article 7)
- "This Directive shall not affect Member States' right to apply or introduce laws, regulations or administrative provisions more favourable to the protection of the safety and health of workers or to facilitate or permit the application of collective agreements or agreements concluded between the two sides of industry which are more favourable to the protection of the safety and health of workers." (Article 15)
- Article 17 of the Directive allows member states to make derogations (exceptions), under certain circumstances, from a number of its provisions, but not from Article 7.
- "Without prejudice to the right of Member States to develop, in the light of changing circumstances, different legislative, regulatory or contractual provisions in the field of working time, as long as the minimum requirements provided for in this Directive are complied with, implementation of this Directive shall not constitute valid grounds for reducing the general level of protection afforded to workers." (Article 18(3))
The Directive is transposed, as appropriate, into UK law in the Working Time Regulations 1998. The provisions of the WTR that are relevant to the decision on rolled-up holiday pay are:
- "A worker is entitled to four weeks' annual leave in each leave year" (Regulation 13(1))
but "it may only be taken in the leave year in respect of which it is due, and it may not be replaced by a payment in lieu except where the worker's employment is terminated." (Regulation 13(9))
- "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))
and "any contractual remuneration paid to a worker in respect of a period of leave goes towards discharging any liability of the employer to make payments under this regulation in respect of that period". (Regulation 16(5))
- "A worker may present a complaint to an employment tribunal that his employer has refused to permit him to exercise any right he has under regulation … 13 … or …16(1)" (Regulation 30(1))
and "where an employment tribunal finds a complaint … well-founded, the tribunal shall make a declaration to that effect, and may make an award of compensation to be paid by the employer to the worker" (Regulation 30(3))
and "the amount of the compensation shall be such as the tribunal considers just and equitable in all the circumstances having regard to the employer's default in refusing to permit the worker to exercise his right, and any loss sustained by the worker which is attributable to the matters complained of" (Regulation 30(4))
and "where … an employment tribunal finds that an employer has failed to pay a worker in accordance with regulation 16(1), it shall order the employer to pay to the worker the amount which it finds to be due to him." Regulation 30(5))
The ECJ's decisions
The ECJ addressed the three key questions raised by the referrals and came to the following conclusions.
- Does Article 7 of the WTD prevent a worker's pay before the introduction of rolled-up holiday pay remaining the same but then being defined as including holiday pay? For example, as in the Frank Staddon case, if a worker's hourly rate is £10 and, after the introduction of rolled-up holiday pay, the worker's hourly rate is £9.23 plus £0.77 holiday pay, is that in breach of the WTD?
Yes. When Article 7 refers to "paid holiday leave", it means that, for the duration of annual leave, the worker's remuneration must be maintained. During holiday leave, workers must receive their normal remuneration for that period of rest. A reduction in the worker's remuneration run's contrary to the requirement and has the effect of "reducing the general level of protection afforded to workers" (Article 18(3)).
- Does Article 7 of the WTD prevent payment for the holiday leave provided for by the WTD from being made in instalments throughout the leave year along with the worker's pay, rather than as a payment for a specific period of holiday leave?
Yes. Although the Directive does not state a specific point at which payment must be made, the point at which payment is made must be such that it ensures that every worker is able to take the annual four weeks' entitlement. As the directive treats entitlement to annual leave and payment for that leave as two aspects of a single right, the objective is that a worker's remuneration during leave should be comparable to remuneration during periods of work. The point at which payment for leave is made must be such that it achieves that objective. Therefore, holiday pay may not be paid in instalments but must be a payment for the specific period of holiday leave.
- Does Article 7 of the WTD prevent payments made to a worker under a rolled-up holiday pay arrangement that is contrary to the Directive from being offset against the worker's entitlement to payment for a specific period of leave?
No. Article 7 does not prevent sums that are paid as holiday pay in addition to the pay due for work performed and that are paid transparently and comprehensibly from being offset against the payment due for a specific period of leave. The burden of proof lies with the employer. Member states must, however, take appropriate measures to ensure that practices incompatible with Article 7 are discontinued.
The answer to the third question provides employers with a defence if a worker makes a claim for unpaid annual leave to an employment tribunal. The employer would have to show that the amounts already paid to the worker for holidays were clearly defined in the contract and on the payslip. If the tribunal decides that the payments were "transparent and comprehensible", any award would be reduced by the amounts already paid.
The decision has been welcomed by the TUC, which sees the decision as providing workers with protection against "rogue bosses" and employment agencies who cheat them out of their holiday pay. Other reports speak of the decision creating an "administrative nightmare. The Recruitment and Employment Confederation, representing recruitment companies, believes that the ruling will harm temporary workers instead of helping them and would make it difficult for them to plan their holidays while working for a number of clients. Employers are likely to find it difficult to persuade workers to take a reduction in their wages now that they have got used to receiving the additional holiday pay on top.
...back to 23 March 2006
Sources:
C. D. Robinson-Steele v R. D. Retail Services Ltd
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