20 March 2006

The lawfulness of employers paying rolled-up holiday pay has been a contentious issue for a number of years. At the end of last week the European Court of Justice (ECJ) decided that the practice is unlawful, but that is not quite the end of the story.

Up until last week’s ECJ decision, the position reached in England and Wales was that rolled-up holiday pay was lawful, as long as there was an additional identifiable payment on top of a worker’s ‘normal’ pay, which represented their holiday pay. It was clear that employers could not simply label an existing part of a worker’s remuneration ‘holiday pay’ and thereby meet their obligations.

The ECJ has now gone further and decided that all rolled-up holiday pay, even where it is clearly an additional payment on top of ‘normal’ pay, is unlawful, and that holiday pay must be paid at the time leave is taken.

This sounds pretty unequivocal, but the matter does not quite end there. This is because Article 7 of the Working Time Directive does not preclude sums that are paid as holiday pay, in addition to normal remuneration, from being set off against the payment for specific leave, provided there is transparency and comprehensibility. The burden is on the employer to prove the transparency of the payment.

Based on this provision, some commentators are saying that, in practice, the new ECJ decision will not bring an end to the use by employers of rolled-up holiday pay. This is because whilst it is technically unlawful, as long as workers do not suffer any financial loss as a result of receiving rolled-up holiday pay, there will be no incentive for them to bring claims and as a result, no disincentive for employers to discontinue a practice which may suit their business. Set against this, the ECJ has made it clear that national governments have a responsibility for eliminating this practice. In view of this, it will be interesting to see what action, if any, the British Government takes if the use of rolled-up holiday pay continues unabated.