Holiday: rolled-up holiday pay
Sue Nickson, Partner and International Head of Human Capital at
The Working Time Regulations 1998 provide that for each week of leave entitlement under the Regulations, the employer must pay the worker one week's pay. In sectors where irregular working patterns are common (typically low-paid sectors), employers often find it convenient, from an administrative point of view, to pay 'rolled-up' hourly or weekly contractual rates, ie a figure that expressly includes an element of holiday pay. No payments are then made when a worker takes a period of leave.
Making holiday payments on a rolled-up basis has practical benefits for employers, as illustrated by the example below.
A nursing home, A Ltd, employs B as a carer. B works irregular hours and is employed on a zero-hours contract. A Ltd pays B £10 per hour plus £0.83 per hour (which equates to the statutory minimum holiday entitlement, ie four weeks' pay paid over 48 weeks, or 8.33% of working pay) in respect of holiday. After 12 weeks, A Ltd terminates B's employment. B was, in effect, paid her holiday entitlement as it accrued so there is no need for A Ltd to calculate any additional holiday entitlement due (although there could be a repayment due if, at the termination date, B has taken more holiday than her pro-rated entitlement).
Legality of rolled-up holiday pay
The legality of rolled-up holiday payments has been being debated since 2003 when the Employment Appeal Tribunal (EAT) held in Marshalls Clay Products v Caulfield and others [2003] IRLR 552 EAT that, in principle, rolled-up holiday pay was lawful, subject to a number of criteria being met - mainly concerning the transparency of the payments being made (see below for further details). However, following a contradictory decision by the Court of Session, the issue was subsequently referred by the Court of Appeal to the European Court of Justice (ECJ), where it joined Robinson-Steele v RD Retail Services Ltd ET/1800174/04 on the same point, referred by the Leeds Employment Tribunal.
The ECJ decision
The ECJ held in Robinson-Steele v RD Retail Services Ltd and other cases [2006] IRLR 386 ECJ that the practice of paying rolled-up holiday pay, rather than making a specific payment in respect of actual time taken off by a worker, is incompatible with the European Working Time Directive and hence with the Working Time Regulations, as it may discourage workers from taking their holiday entitlement. In particular, the ECJ found that:
the Directive precludes part of a worker's rate of pay from being attributed to payment for annual leave without the worker receiving an additional payment in respect of the holiday (ie employers cannot simply allocate part of an existing wage packet to holiday pay); and
the Directive further precludes the payment for minimum annual leave from being paid as a staggered payment over a period of work done and paid together with remuneration for work done, rather than in the form of a separate payment for a specific period during which the worker actually takes leave (ie employers must pay holiday pay when holiday is taken).
Therefore, on the face of it, rolled-up holiday payments are unlawful.
However, the ECJ also held that the Directive allows sums that are paid transparently and comprehensibly in respect of minimum annual leave over a period of work done together with remuneration for work done (ie staggered) to be set off against any payments due for specific leave that is taken by the worker (ie if an employer has nonetheless made a rolled-up payment it would be entitled to set this off against any claim a worker might bring for unpaid statutory holiday pay) provided that any arrangements for holiday pay were transparent, as in the care home example above. The ECJ placed the burden of proving the transparency of the payment on the employer.
In practical terms, the upshot of the ECJ's decision is that there is little financial incentive for workers to bring a claim for unpaid holiday pay as they will not have suffered any actual losses and, therefore, would not be awarded any damages by an employment tribunal.
Transparency
In order to understand how employers can achieve the transparency requirement, it is necessary to look back at the original EAT decision in 2003, which set out a number of criteria in this respect, namely that:
rolled-up holiday pay must be clearly incorporated into the worker's employment contract (and therefore have the worker's express agreement);
the allocation of the percentage or amount of holiday pay must be clearly identified in the worker's employment contract and preferably also on the worker's payslip;
the payment for holiday pay must be a true addition to the contractual rate of pay; and
records of holidays must be kept and reasonably practicable steps taken to ensure that workers take their leave during the holiday year.
These criteria have become and, pending legal changes, will continue to be best practice for employers that make rolled-up holiday payments.
Government guidance
As a result of the ECJ decision, the Government has amended its guidance on the Working Time Regulations. In particular, it now recommends that employers 'renegotiate contracts involving "rolled-up holiday pay" for existing workers as soon as possible so that statutory holiday pay is made at the time when the holiday is taken'. However, the guidance also states that during this renegotiation period and in accordance with the ECJ decision 'transparent and comprehensible' rolled-up holiday payments can continue to be made.
Practical steps
Employers that wish to continue making rolled-up holiday payments should review their new and existing employment contracts to ensure that they are carefully drafted and sufficiently transparent to allow workers to understand any payments in respect of holiday. They should also ensure adherence to the best practice criteria set out above.
In addition, employers should note that rolled-up holiday pay may be completely outlawed in the future, as the ECJ also said in its judgment that 'member states are required to take the measures appropriate to ensure that practices incompatible with Article 7 [of the Directive] are not continued'. Whether the Government takes heed of this warning and amends the holiday pay rules in the Working Time Regulations remains to be seen.
Next week's article will look at holiday in relation to part-time workers.
Sue Nickson is Partner and International Head of Human Capital
at
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