Are ‘roll-ups’ legal

Some employers have attempted to comply with the Working Time Directive
(WTR) requirement for paid holiday by increasing the hourly rate of their
workers and requiring the recipients to put the money aside to enable them to
take the statutory holiday , rather than make payment when the holiday is
taken.

This issue of whether or not such ‘rolled-up’ payment of holiday pay is
lawful has been much disputed in English and Scottish courts and tribunals over
the past 12 months.

The point was examined by the Inner House of the Scottish Court of Session
in MPB Structures Limited v Munro 2003. There, the employer argued that an 8
per cent increase in weekly pay for its workers was an allowance enabling the
employees to cover their entitlement to paid holiday, and was lawful. The
employer did not ensure that the employees took their requisite holiday
entitlement which, under the WTR, is deemed necessary to protect health and
safety.

The Court of Session decided that the provision of increased pay, despite it
being expressly stated that the 8 per cent increase related to holiday
entitlements, did not discharge the employer’s liability to make payment for
holiday pay. This deeply concerned other employers who were using this method
to pay holiday payments to employees, including many temporary worker agencies.

The decision also conflicted with the earlier Court of Appeal decision in
Gridquest Limited v Blackburn & others 2002. It was stated that rolled up
payments are lawful if the employer made it clear to the workers that the
hourly rate covered payment for holiday entitlements.

If the MPB case was followed, a number of organisations would be faced with
substantial claims for unpaid holiday pay. The Lift Design Group Limited 2002
cases had decided that workers’ claims would not be limited to the normal
three-month limitation period, but that workers would be able to bring a claim
for unpaid holiday pay dating back to the introduction of the WTR in October
1998. This was on the basis that failure to pay full holiday pay runs from the
date of the last failure to provide holiday pay.

To trigger a claim, they needed only to ask for holiday pay and if the
employer attempted to argue that such pay had already been received by virtue
of the rolled-up amount paid, this would trigger a new claim.

The issue has now most recently been examined by the English Employment
Appeal Tribunal (EAT) in five combined cases: Marshalls Clay Products Ltd v
Caulfield, Pearce v Huw Howatson Limited, Clarke v Frank Staddon Limited,
Sutton v Potting Construction Limited and Hoy v Hanlin Construction, 2003 IRLR
55.

Neatly avoiding the issue of whether they were actually bound by the
Scottish decision, the EAT accepted that ‘rolled up’ employment contracts fell
within five separate categories. The first three were held to be invalid,
namely:

– Category one: contracts between the worker and the employer, which are
silent in relation to holiday pay

– Category two: contracts that purport to exclude any liability for
entitlement to holiday pay

– Category three: contracts where the rates are said to include holiday pay,
but there is no indication or specification of any amount.

The next two were held to be valid, namely:

– Category four: contracts providing for a basic salary or rate topped up by
a specific sum or percentage in respect of holiday pay

– Category five: contracts where holiday pay is allocated to and paid during
(or immediately prior to or immediately after) specific periods of holiday.

Although this is probably not the end of the debate, at present, if ‘rolled
up’ holiday payments are desired, employers should:

– expressly agree the method of holiday payment in the contract of
employment

– specify the percentage or amount clearly in the contract and on pay slips

– genuinely increase payments above the previous rate

– keep records of the holidays taken

– take reasonable steps to ensure holidays are taken during the holiday
year.

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