30 September 2003

KEEBLE HAWSON

E-MAIL UPDATE

Holiday Pay - "Rolled-up" payments

Under the Working Time Regulations 1998 ( the Regulations), all "workers" as defined in the Regulations are entitled to a minimum period of 4 weeks annual leave. The Regulations provide that for each week of leave, the employer must pay one week's pay. In some sectors, notably the construction industry, employers have traditionally sought to discharge their liability by including an element of holiday pay "rolled-up" in the hourly, daily or weekly payments made to their workers. The purpose of this is to avoid the employer then having to pay holiday pay at the time workers are on leave. There has however been a great deal of debate as to whether this practice complies fully with the Regulations.

In the recent case of Marshalls Clay Products Limited v Caulfield (together with other joined cases), the Employment Appeal Tribunal considered the question of whether such payments are permissible under the Regulations.

In coming to its decision, the EAT identified 5 different categories of contract relating to holiday pay :-
1. Contracts that are silent on the issue of holiday pay.
2. Contracts that purport to exclude any liability for entitlement to holiday pay.
3. Contracts where the rates of pay are stated to include holiday pay but there is no indication or specification of an amount.

4. Contracts that provide for a basic wage or rate of pay topped up by a specific sum or percentage in respect of holiday pay.

5. Contracts where holiday pay is allocated to and paid during specific periods of holiday.

The EAT decided that only categories 4 and 5 above are lawful as they comply with the Regulations. This followed the reasoning of an earlier Court of Appeal case which we reported in a previous EMU. However, there appears now to be a major inconsistency between the law in England and Scotland as the Court of Session (the Scottish equivalent of the English Court of Appeal) came to a different conclusion.

From an employer's perspective, it is clear that careful drafting is required when dealing with a rolled-up holiday clause. It does appear to be the case that employers in England and Wales can continue to pay an enhanced rate in respect of holidays during working periods.

The EAT also offered guidance on the issue of rolled-up holiday payments and suggested that employers take the following measures in order to minimise the risk of such contractual payments not complying with the Regulations.

· The rolled-up holiday pay must be clearly incorporated into the individual contract and thus expressly agreed.
· The percentage or amount of holiday pay allocated must be clearly identified in the contract and preferably on the payslip.

· It must amount to a true addition to the contractual rate of pay.
· Records of holidays must be kept.
· Reasonably practicable steps must be taken by employers to require workers to take their holidays before the expiry of the relevant holiday period.

It should also be noted as a final word of caution that the provisions regarding holiday pay apply to "workers" which is a broader category of labour than "employees" and therefore companies will not be able to avoid liability for holiday pay by arguing that the "worker" is self employed. The often difficult issue of whether someone is an employee, worker or truly self employed is one which we can only resolve and properly advise upon once we are in possession of all the relevant facts.

For more information contact:-

Paul Grindley
0113 244 3121

Sarah Hall
0114 272 2061

www.keeblehawson.co.uk

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