ECJ calls time on 'rolled up' holiday pay

This article appeared in Building in March 2006 and was written by Philip Titchmarsh, Senior Associate in the Employment Group at Pinsent Masons who are acting for the employer in the Caulfield case

A ruling last week by the European Court of Justice (ECJ) in the case Caulfield v Hanson Clay Products indicates ‘rolled-up’ holiday pay is unlawful.

‘Rolled-up’ holiday pay refers to the practice of an employer agreeing with workers that their pay for annual leave is added to and paid with their hourly or daily remuneration but not paid in respect of a specific period of leave actually taken. In the construction sector, where irregular working patterns and short-term contracts are common, employers often find it convenient to roll up holiday pay.

Payment of holiday pay through this rolled up hourly pay system is administratively convenient for employers as they do not have to specifically calculate holiday pay every time a worker takes leave, which is especially beneficial for the employer in circumstances where hours of work (and therefore amounts of pay) fluctuate throughout the year.  However the system has been criticised as discouraging workers from taking holiday, particularly as the more work the individual carries out the more pay they earn during the year.

The ECJ has decided that the practice of rolling up holiday pay is not lawful under the Working Time Directive. Holiday pay must be paid in respect of a specific period during which the worker actually takes leave. Unusually, the ECJ has taken a harder line than the Advocate General in her advisory opinion to the Court last year. There it was suggested that rolled-up holiday pay could be lawful subject to the employer putting in place safeguards to ensure that workers could take the four weeks' leave to which they are entitled under the Directive.

The ECJ Judgment is particularly significant because of the conflicting case law in the UK - in the Hanson case the EAT and the Court of Appeal were inclined to allow employers to use rolled-up hourly rates of pay, but there is a Scottish Court of Session case (MPB Structures Limited v Munro) which ruled that these practices were unlawful.

Because rolled up holiday pay has been found to be unlawful by the ECJ, employers are likely to face administrative inconvenience. But it's not all bad news. They could also have had to face the problem of not being given credit for the holiday element of the rolled-up rate so as to set this off against the entitlement to holiday pay under the Directive. It is good news for employers that the ECJ Judgment allows for off-setting where the rolled-up holiday pay system has been operated in a transparent and comprehensible manner. 

However, this potential for set-off does not mean employers will be able to continue with rolled-up holiday pay arrangements. The ECJ Judgment says that Member States are required to take the steps necessary to make sure "practices contrary to the Directive are not continued".

It had been thought that there would also be the potential for large claims for backdated holiday pay going back as far as 1 October 1998 when the Working Time Directive was implemented in to domestic law by the Working Time Regulations. However, in a 2005 case the Court of Appeal held that claims to enforce entitlement to holiday pay can only be brought under the Working Time Regulations and not as a claim for unauthorised deductions from wages. The effect of this is to limit a claim for backdated holiday entitlement to the most recent holiday year.

In practical terms, it would seem that the practice of paying rolled-up holiday pay is going to have to stop because the ECJ has decided that it can lead to workers not taking their leave entitlement under the Working Time Regulations. Employers who use systems of rolled-up holiday pay would be best advised to change to a system which ensures that workers are paid in respect of specific periods of leave.

There is good news for employers who have already paid sums to workers in respect of holiday pay in a transparent and comprehensible way as part of a rolled-up rate, as they will be entitled to credit for such sums against payment due for a specific period of leave. There is only likely to be a financial exposure as a result of the ECJ's Judgment for those employers who have paid rolled-up holiday pay in a way which lacks transparency.

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