07 February 2005
Under the Working Time Regulations 1998 ("WTR") all workers are entitled to a minimum period of 4 working weeks’ annual leave. For each week of leave the employer must pay that worker one week’s pay.
Sound straightforward? It is until you seek to discharge this liability by including an element of holiday pay rolled up in the hourly, daily or weekly payments made to the worker. This practice has created a debate as to whether "rolled-up holiday pay" complies with the WTR and has led to conflicting case decisions….
In April 2004 the Court of Appeal upheld the decision of the EAT in the case of Marshalls Clay Products Ltd v Caulfield and Others (2003). The EAT held that there was no reason in principle why monies paid as part of a rolled up rate should not count towards an employer’s liability to pay holiday pay. This was the case even where a payment was not made in relation to a particular period of leave and was not paid at the time leave was actually taken, provided that the specific sum or percentage of wages to be allocated to holiday was clearly identified.
The EAT analysed a number of scenarios regarding holiday pay and concluded that the following were permissible:
- Contracts providing for a basic wage or rate topped up by a specific sum or percentage in respect of holiday pay
- Contracts where holiday pay is allocated to and paid during (or immediately before or after) specific periods of holiday
The EAT further held that the following situations were in breach of the Regulations:
- Contracts which are silent as to holiday pay
- Contracts which purport to exclude liability for holiday pay
- Contracts where rates are said to include an amount for holiday pay but there is no indication or specification of an amount
The EAT also gave the following guidance as to good practice:
- Rolled up holiday pay must be clearly incorporated into the individual contract of employment, and thus expressly agreed
- The allocation of the percentage or amount to holiday pay must be clearly identified in the contract and preferably also in the payslip
- It must amount to a true addition to the contractual rate of pay
- Records of holidays taken must be kept
- Reasonably practicable steps must be taken to require the workers to take their holiday before the expiry of the relevant holiday year
This guidance has been reissued, following the five appeals in Smith v AJ Morrisroes and Sons Ltd and other appeals in November 2004.
However, in Robinson-Steele v RF Retail Services Ltd (2004) a Leeds Employment Tribunal preferred the decision of the Court of Session in Munro which had held that hourly or weekly rates of pay which expressly included an element of holiday pay did not satisfy the requirements of the EU Directive and the payment should be made in association with the taking of the leave and not separately. The Court of Session was of the opinion that including holiday pay as an element of a rolled up rate of pay discouraged employees from taking holidays, because workers would first have to have saved sufficient funds from their weekly allowance to cover the full amount of leave taken. Consequently, the practice conflicted with the objectives of the WTR. Decisions of the Court of Session do not bind Employment Tribunals in England and so the Leeds Tribunal referred the issue directly to the European Court of Justice.
The two questions referred are:
- Does the EC Working Time Directive preclude rolled up payments which do not relate to specific periods of leave taken by the worker?
- Should an employer be given credit for making such payments in the event that a claim is brought against them?
The ECJ could issue workers with a winning ticket if they find that the rolled up payment method is inconsistent with the Working Time Directive. This would mean a large number of employers, who have not sought to avoid their obligations under the regulations, could face potentially large claims for unpaid holiday pay stretching back to the introduction of the Regulations in October 1998.