Caulfield v Hansen Clay Products Limited

Caulfield v Hansen Clay Products Limited
European Court of Justice

Under the Working Time Regulations, workers are entitled to four weeks’ paid annual leave. Ever since this right was introduced in 1998, there has been uncertainty as to whether employers are required to pay holiday pay at the time when the holiday is taken, or whether employers can lawfully ‘roll up’ the holiday pay into regular pay – with the effect that the worker does not receive any pay during periods of annual leave.

Until now, there has been conflicting authority on the legality of this practice. Numerous challenges have been brought at employment tribunals, and the Scottish and English courts have each taken a different approach. Previously, the EAT in Marshalls Clay (now Hansen Clay) v Caulfield had held that such arrangements were lawful, provided they were incorporated into a binding contract and were sufficiently transparent to identify the amount paid in respect of holiday. However, the Scottish Court of Session ruled that such arrangements are unlawful in the case of MPB Structures Limited v Munro.

The ECJ has now held that the practice of rolling up holiday pay is unlawful as it is contrary to the Working Time Directive. But the ECJ’s decision may be a pyrrhic victory for those opposed to this practice. While the ECJ has declared the practice unlawful, it has also ruled that any payments made – transparently and comprehensibly – in respect of holidays under a rolled-up scheme can be offset against liability for payments due during holiday periods.

In direct response to this case, the DTI has revised its guidance on holiday pay as follows: “Following an ECJ judgment on 16 March 2006, rolled-up holiday pay (RHP) is considered unlawful. Employers should renegotiate contracts involving RHP for existing employees/workers as soon as possible, so that payment for statutory annual leave is made at the time when the leave is taken. Where an employer has already given RHP in relation to work undertaken, and the payments have been made in a transparent and comprehensible manner, they can be set off against any future leave payments made at the proper time.”

Key points

  • The ECJ has stated categorically that rolling up holiday pay is unlawful as it is contrary to the Working Time Directive and that holiday pay must be paid in respect of the period during which the worker actually takes leave. For many employers this will be an administrative nightmare – especially for those operating in industries with short-term contracts and complex shift patterns.
  • Employers that pay holiday pay in a transparent and comprehensible way as part of rolled-up rate will, however, be entitled to credit for such sums against payment due for a specific period of leave.

What you should do

  • If you are currently using a system of rolled-up holiday pay, consider switching to a system under which workers receive pay in respect of specific periods of leave.
  • If you choose to continue with a system of rolled-up holiday pay, check that it is transparent and comprehensible so that, should the matter go to a tribunal, you receive ‘credit’ for the rolled-up holiday pay you are paying. Under the Working Time Regulations (WTR), the only compensation a tribunal can award for a failure to pay holiday pay is the amount of holiday pay due to the worker (although it remains to be seen whether an employee could argue that the system of rolling up holiday pay prevents them from taking holiday. In this case, the tribunal can award ‘just and equitable compensation). If you continue to roll up holiday pay, you will be in breach of the WTR, but if your holiday pay system is transparent and easy to understand, the financial risk appears to be small.

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