Advocate General Stix-Hackl, in an Opinion given on 27 October 2005, has proposed that the European Court of Justice, to which questions relating to the practice of rolled-up holiday pay have been referred in three cases by a UK employment tribunal and by the Court of Appeal, could approve the practice if provisions exist to ensure that workers are actually able to take their full leave entitlement. However, such provisions do not appear to exist in current UK rolled-up holiday pay arrangements.

It must be understood that, although Opinions given by Advocates General are generally followed by the European Court of Justice (ECJ), they are not binding on the ECJ. The following review does not necessarily, therefore, represent the final view of the ECJ which may not be given for several months.

The practice of paying holiday pay in instalments each payday, i.e. "rolling-up" holiday pay into the rate of pay, instead of paying holiday pay at or about the time that the holiday is taken, is a device used most commonly for temporary or casual workers where the period of employment is uncertain and the periods between employment are usually used as holidays. The device is also used in some industries for shift workers.

The conflict

The legal status of rolled-up holiday pay in the UK is confused as the result of two conflicting court decisions.

• In April 2003, the Inner House of the Court of Session, Scotland's Court of Appeal, in the case MPB Structures Ltd v Munro, confirmed the finding of the Edinburgh Employment Appeal Tribunal a year earlier that an agreement is void if it includes holiday pay in wages regardless of whether leave is actually taken.
  
  
• In June 2003, the London Employment Appeal Tribunal (EAT), in the case Marshalls Clay Products Ltd v Caulfield and Others, held that rolled-up holiday pay is lawful if certain conditions are met, in particular that the addition to basic pay is defined in the employment contract in terms of a specified amount or percentage. The conditions were redefined in the November 2004 decision of the London EAT in the case Smith v Morrisroes & Sons Ltd, but to the same effect.

The Directive

The right of workers to paid holiday leave derives from the European Directive on the organisation of working time. The community law, set out in Article 7 of the Directive, says:

1. "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.
   
   
2. The minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated."

The Regulations

Each member state is able to decide how to provide these rights within its own national law. In the UK, the statutory right to paid holiday leave is set out in the Working Time Regulations 1998. The relevant regulations (abbreviated) for the purposes of this article state:

1. Robinson-Steele v R D Retail Services Ltd (Note that the names of the parties to this case appear to have been corrected since it was originally reported.) Mr. Robinson-Steele is 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 to the employment tribunal 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.
   
   Faced with the contradictory decisions of the Scottish and English EATs (and not feeling bound by the judgement of the Scottish Court of Session), the tribunal decided that it preferred the interpretation of the paid annual leave rules made by the Scottish EAT in the Munro case, i.e. that rolled-up holiday pay is unlawful. In order to settle the issue, the tribunal decided to adjourn the proceedings and refer two questions to the European Court of Justice (ECJ). The questions are considered below.
   
   
2. Caulfield and Others v Marshalls Clay Products Ltd and Clarke v Frank Staddon Ltd These were two appeals from EAT decisions that were considered together by the Court of Appeal in April 2004. In the Marshalls Clay case, the employer and trade union introduced rolled-up holiday pay under a joint agreement that applied to shift workers. The workers claimed that this was unlawful but the EAT, as already mentioned above, decided that rolled-up holiday pay is a lawful arrangement if certain conditions were met. Similarly, 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. The EAT decided that the arrangement was lawful.
   
   The Appeal Court's conclusion, after hearing all of the arguments, was that the EAT decisions in both cases do not conflict with the Directive and the Working Time Regulations. However, conscious 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 European Court of Justice. These questions are also considered below.
   
   

The first question

The Advocate General summarised the first questions raised by the employment tribunal and by the Court of Appeal as to whether the entitlement to paid annual leave under Article 7 of the Directive precludes in principle agreements for rolled-up holiday pay.

The starting point is that Article 7(1) gives only an entitlement in principle and gives little indication of how the employer's corresponding obligations are to be fulfilled. There is merely a reference to "national legislation and/or practice". How remuneration for the period of leave is to be provided is left open; it could be made before, during or after the leave, or as set out in national legislation.

The Advocate General describes the spirit and purpose of minimum annual leave as the protection of the safety and health of workers. For that to be achieved, it is necessary for the worker to be

• actually granted the leave, which is why the Directive prohibits replacing the minimum annual leave by a money payment, except where the employment relationship is terminated, and
  
  
• actually put in a position of being able to take the leave and not deterred in any way from doing so, which is why there is a guarantee of pay for the leave.

In reviewing the submissions of the parties, the UK and Ireland governments and the European Commission, the Advocate General concentrated on this issue of whether the method of payment for annual leave affects the effective possibility of taking leave. In other words, does the practice of rolled-up holiday pay serve to deter workers from taking their minimum annual leave entitlement?

The UK government's submission was in favour of the practice of rolled-up holiday pay, on the basis that:

• the Directive provides for flexibility by referring to national law and practice
  
  
• Regulation 16 of the WTR adequately transposes Article 7 of the Directive
  
  
• rolled-up holiday pay does not dissuade workers from taking leave as it must be defined in an agreement between the parties
  
  
• it means that a worker is paid in advance for annual leave if it is taken later in the period of employment
  
  
• workers can be expected to take steps to make sure that the payment of holiday pay in instalments does not discourage them from taking leave
  
  
• it is the fairest and least complicated method in the case of short-term workers whose employment relationship may end before they are able to claim any holiday or payment
  
  
• in the case of casual or temporary workers, payment at the time when the holiday is taken would lead to considerable administrative difficulties for employers.

In contrast, the submissions of the Ireland government and the European Commission was that rolled-up holiday pay

• militates against taking leave, since workers are then required to take leave during which they are not paid, whereas if they work they are paid regularly every week or month
  
  
• circumvents the fundamental requirement of ensuring a minimum of four weeks of annual leave, contrary to both the wording and the purpose of the Directive
• may discourage workers from taking leave
  
  
• may lead to abuse on the part of employers who do not want their employees actually to take their leave.

Where there is a permanent employment relationship and the working hours are regular, as in the case of the shift workers in the Marshalls Clay case, the Advocate General stated that "it is not evident at first sight why there should be any need for an exception to the principle that pay continues to be paid during leave". However, he accepted that an agreement on rolled-up holiday pay does not appear to be harmful as long as "it does not affect the effective possibility of taking the minimum annual leave".

The Advocate General acknowledged the particular problems that arise in the case of temporary workers. It is not often possible to foresee the periods that the worker will work. Rather than calculating termination holiday pay, as provided by Article 7(2), he stated that "it appears more sensible in fact to provide for continuing payment in instalments, so that the employer always compensates in each case for that part of the entitlement to paid annual leave which the temporary worker has acquired in that employment in the current year". However, he stressed the relatively insecure status of temporary workers in the labour market and was concerned that, unless measures were put in place that corresponded with the right to payment on termination, rolled-up holiday pay "could scarcely be harmonised with the purpose of the Directive".

Consequently, the Advocate General's proposed answer to the first question is that "it is for the national court, when assessing individual or collective agreements on rolled-up holiday pay, to examine to what extent workers have an effective possibility of actually taking the minimum annual leave to which they are entitled". It would probably not be possible to demonstrate that "without regulating - possibly in a further agreement - the taking of leave itself".

The second question

The second question addressed by the Advocate General was whether, if an agreement on rolled-up holiday pay is permissible in principle, it would nevertheless be precluded if the employee's pay were the same before and after the agreement took effect, i.e. the agreement did not bring about any additional remuneration but led instead to part of the remuneration payable to the employee being attributed to holiday pay. This situation is at issue in the Frank Staddon case.

The application of Article 7 of the Directive must effectively lead to holiday pay being paid in addition to the wages. If a worker's pay is the same before and after the introduction of a rolled-up holiday pay agreement, it is obvious that the employer is fulfilling his obligations only in appearance. However, in the Frank Staddon case, the pay before the agreement included holiday pay; it was the precise proportion that was fixed by the agreement.

The real issue identified by the Advocate General, was one of transparency. If it is not possible to identify the proportion of pay that is holiday pay, it will be difficult for a worker, especially one with a low income, actually to save the appropriate amount to use when taking holiday leave. A lack of transparency serves therefore to deter the worker from taking the minimum annual leave.

The third question

The final question considered by the Advocate General was whether, if an agreement on rolled-up holiday pay is not permitted, the remuneration already paid under the agreement may be set against the continuing entitlement to payment for the annual leave in question. In other words, if a rolled-up holiday pay agreement were considered unlawful, could the payments that had already been made unlawfully in instalments be offset against any monetary award set by the court or tribunal? This is perhaps the most serious issue to those employers who have operated rolled-up holiday pay agreements for some time. Could they be required, in effect, to pay for holiday leave twice?

The Advocate General took the view that the objective of an effective possibility of taking leave cannot be achieved retrospectively because a worker is only likely to bring a claim for payment of holiday pay after the end of the year in question. An order by a court that an employer must pay the holiday pay again without setting off the amounts already paid would be purely punitive in nature.

Consequently, even if an agreement on rolled-up holiday pay does not guarantee the effective possibility of a worker taking the full leave entitlement, the Directive does not preclude sums which can be shown to have been paid as holiday pay in a way that was transparent to the worker from being set off against any claims the worker may have.

The Advocate General suggested that, in order to provide effective legal protection for workers, it might be appropriate not to treat instalments of holiday pay as meeting the Article 7 requirements if the payments do not meet the transparency requirement. It may deter employers from introducing agreements that are not permitted. A contrary argument, however, would be that the employee would then receive a further financial incentive not to take the minimum leave which is to be allowed.

Summary

This Opinion will be welcome news to the many employers who currently operate rolled-up holiday pay agreements. As long as the payment arrangements are transparent, they are unlikely ever to have to pay the holiday pay twice. The Opinion is, of course, still subject to confirmation by the ECJ and that court could conceivably take a different view.

There are two important requirements highlighted by the Advocate General for a rolled-up holiday agreement to be permitted under the requirements of the Directive and the WTR:

1. that the amount included in the pay for the period that represents holiday pay should be clear to the worker, and
   
   
2. that 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.

The first requirement is unlikely to be a problem for employers. The conditions set out by the EAT in the Marshalls Clay case, as subsequently amended by the EAT in the Morrisroes case, state:

The second of the Advocate General's requirements has not been addressed before and, if it is confirmed as a requirement by the ECJ, will be a problem for employers in the UK. Unless workers save their holiday pay instead of treating it as part of their regular income, the deterrent effect of rolled-up holiday will not be overcome. How can they be encouraged, or even made, to save the money?

A possible solution already exists but it has not yet been generally applied to the situation of temporary and casual workers. Several Member States have holiday or pay settlement funds. In the Belgian and French systems of "Caisses de congés payés", employers pay contributions to the fund and the fund, in turn, pays holiday pay to the worker at the time that leave is taken.

Similar schemes already exist already in the UK. HMRC's CWG2 booklet, on page 26, describes holiday pay schemes in the construction industry where a group of employers contribute to a central, independently managed holiday pay fund (such as electrical contracting, heating, ventilation and domestic engineering industries). Some schemes allow the employer to draw the money from the fund to make the payments; other schemes pay the holiday pay direct to the employer.

Could such holiday pay funds be the final solution to the rolled-up holiday issues?

...back to 10 November 2005

Sources:
Jurisprudence Recente

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