The European Court of Justice (ECJ) has ruled in Caulfield v Hanson Clay Products Ltd (formerly Marshalls Clay Products Ltd) that the practice of paying workers rolled-up holiday pay is unlawful, unless the system for making the payment is sufficiently transparent and comprehensible. Where the latter can be shown, employers can offset those payments against money due for the specific period when leave is actually taken.
Q What is rolled-up holiday pay?
A The practice of not paying holiday pay while a worker is on holiday, but making an additional payment during the weeks that the employee works, to represent pay due in respect of holiday periods. In effect, the worker receives an enhanced hourly rate to compensate for the fact that holiday pay will not be paid when holiday is taken.
Q What holiday rights do workers have?
A Under the Working Time Directive (WTD), all workers in the EU are entitled to a minimum of four weeks’ paid leave each year. This may not be replaced by payment in lieu, except where the employment relationship is terminated.
Q What did the ECJ say?
A The ECJ considered the meaning of the WTD directive and held that it:
- does not allow part of the existing remuneration payable for work done to be attributed to a payment for annual leave
- does not allow, as a principle, rolled-up holiday pay arrangements
- allows amounts paid to a worker as holiday pay under a rolled-up holiday pay arrangement to be offset against their entitlement to holiday pay for a specific period of annual leave, provided the arrangements are transparent and comprehensible.
The ECJ’s reasoning is that staff may feel pressured not to take leave.
Q Will the judgment apply to all industries?
A Yes, including those where rolled-up holiday pay is common – for example, in the entertainment, construction and manufacturing sectors, where staff are employed on short-term, temporary or casual contracts, or work irregular shifts. This will inevitably cause administrative difficulties for employers in these industries when they calculate holiday pay.
Q What happens if a worker is not paid enough holiday pay?
A Employers need to be aware of two areas where liability can arise. The first is not paying holiday pay at all. The second is ensuring that holiday pay is properly calculated. It can be particularly difficult for staff who work irregular hours. The directive requires holiday pay for such workers to be calculated based on the preceding 12-week average. But this may well lead to employers making imprecise calculations. For example, a worker may take all their holiday entitlement immediately after an unusually busy period, where they have worked longer hours and earned more pay than usual.
In such situations, it was thought that the workers could sue the employer for a breach of the WTR, breach of contract, unlawful deduction of wages and that it may be possible to bring a constructive dismissal claim. However, case law has recently clarified that any claims must be brought under the WTR (Ainsworth and others v Commissioners of Inland Revenue). Even so, many employers have fallen foul of using pay systems based on the wrong holiday pay calculation, and now find themselves having to pay huge sums of money to correct the error.
Q What should employers do?
A Holiday pay must now be paid in respect of a specific period during which the worker actually takes leave. However, if the employer can show that the payments were made as part of a rolled-up rate in a transparent and comprehensible way, the payments may be offset against specific leave.
For a system to be transparent and comprehensible, the burden is on the employer to show that:
- rolled-up holiday pay is clearly incorporated into the individual contract of employment, and therefore has been expressly agreed
- the allocation of the percentage or amount of holiday pay is clearly identified in the contract and preferably also on the payslip
- holiday pay amounts to a true addition to the contractual rate of pay
- records of holiday taken have been kept
- practical steps have been taken to require workers to take their holidays before the end of the relevant holiday year.
For more on the European Court of Justice ruling, go to www.personneltoday.com/34525.article
Ranjit Dhindsa, employment partner, Reed Smith