The Employment Appeal Tribunal (EAT), sitting in London, has set out new guidelines for determining whether, under the requirements of the Working Time Regulations 1998(WTR), the practice of paying "rolled-up" holiday pay is lawful.

The story so far…
An employer pays "rolled-up" holiday pay when an amount of holiday pay is paid on each payday instead of at the time that the holiday is taken. The guidelines that currently allow this practice to be lawful in England and Wales were set out by the London EAT in July 2003. In Scotland, the practice was declared unlawful by the Edinburgh EAT and the Scottish Court of Session.

Although rolled-up holiday pay is currently regulated in England and Wales by the EAT's guidelines, there is still serious doubt over whether the practice is legal at all under the European Working Time Directive. A decision on this is awaited following a referral of the matter to the European Court of Justice by the Leeds Employment Tribunal in the case Robinson-Steel -v- R F Retail Services Ltd.

For further information about this background, see our newsletters of 23 April 2004 and 1 August 2003.

The 2003 guidelines
The London EAT, in July 2003, provided the following 5-point guidelines to ensure that, where holiday pay is rolled-up with wages, all the provisions of the WTR are met:

1. The rolled-up holiday pay must be clearly incorporated into the individual contract of employment, and thus expressly agreed.
   
   
2. The allocation of the percentage or amount to holiday pay must be clearly identified in the contract, and preferably also in the payslip.
   
   
3. It must amount to a true addition to the contractual rate of pay.
   
   
4. Records of holidays taken must be kept.
   
   
5. Reasonably practicable steps must be taken to require the workers to take their holidays before the expiry of the relevant holiday year.

The revised guidelines
The London EAT, in November 2004, made decisions on rolled-up holiday pay in three cases that had been appealed. In order to apply consistent criteria to the cases, the EAT changed the original guidelines into a single requirement that must be supported by appropriate evidence. The new guidelines are expressed as follows:

"There must be mutual agreement for genuine payment for holidays, representing a true addition to the contractual rate of pay for time worked. The best way of evidencing this is for:

1. the provision for rolled-up holiday pay to be clearly incorporated into the contract of employment,
   
   
2. the percentage or amount allocated to holiday pay (or particulars sufficient to enable it to be calculated) to be identified in the contract, and preferably also in the payslip,
   
   
3. records to be kept of holidays taken (or of absences from work when holidays can be taken) and for reasonably practicable steps to be taken to ensure that workers take their holidays before the end of the relevant holiday year."
   
   

The EAT, in redefining the guidelines in this way, took the view that what is most important is that holiday pay is in fact being paid and that there is a "true addition" to the contractual rate of pay for time worked.

The EAT also stated that, unless the ECJ rules otherwise, the payment of rolled-up holiday pay appears to be the most practical way of paying for holidays in certain situations, in particular for short-term employment. It also noted that the practice is often negotiated by and with trade unions.

Applying the guidelines
The EAT applied its new guidelines to the three cases that it was considering.

In the case Smith v Morrisroes & Sons Ltd, Mr. Smith was being paid £150 per day (without entitlement to holiday pay) when, in 2002, the payment was changed so that £12 of the £150 was retained by the employer for payment when he took holiday. When Mr. Smith refused to sign a new contract to this effect, the employer continued to pay the £150 but showed it as £138.46 pay and £11.54 holiday pay on the payslip.

Using the new guidelines, the EAT found that there was no "mutual agreement for genuine payment for holidays, representing a true addition to the contractual rate of pay for time worked". The rate of £150 per day remained the same, both before and afterwards.

In the case J J Cafferkey & Co Ltd v Byrne, Mr. Byrne was told on the day he was engaged that his rate of pay would be £140 per day. The following day he was asked to sign a contract that indicated that the £140 included 8% for holiday pay.

The EAT upheld the employment tribunal's decision on the basis that, under the new guidelines, there was no mutual agreement and no evidence that the payment was a true addition. However, it did comment that defining the payment arrangements as a gross amount that included 8% holiday pay is not in itself unacceptable as long as the other aspects of the guidelines are met.

In the case Wiggins v North Yorkshire County Council, Mr. Wiggins, as a part-time "unattached teacher" working in different schools as directed, was paid an hourly rate that included an amount for holiday pay. The way in which his pay was determined was set out clearly in agreements made between employers' associations and trade unions, but the details were not expressly stated in his individual contract.

The employment tribunal had held that the original guidelines were met and the EAT agreed. The EAT commented that "there are more ways of establishing a contractual provision in the employment field than an express agreement, be it oral or in writing, in the usual sense. Such methods can include incorporation by or from a collective agreement, by custom or practice, or by statute."



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Sources:
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