13 May 2003

Simkins early warning - Employment

Under the Working Time Regulations 1998, all workers are entitled to a
minimum of 4 weeks' holiday. The regulations state that for each week of
holiday, the employer must pay the individual one week's pay. A practice has
developed of including an element of holiday pay in an individual's salary,
sometimes known as "rolled up" holiday pay. This means that the employer
does not have to pay an individual at the time he or she is on holiday.

The regulations apply to all workers, not just employees. In the film and
television industries, there is a long tradition of engaging freelancers,
who are not employees of the production company. The agreed rates were
deemed to include an element of holiday pay. It is tempting for production
companies to continue this practice and provide for rolled up holiday in the
agreements they enter into with production staff.

Until recently the legitimacy of rolled up holiday pay was unclear, the
Court of Appeal in Gridquest v Blackburn (2002) having declined to make a
finding on the issue. However, a decision last month of the Scottish Court
of Session, MPB Structures Ltd v Munro, has gone some way towards resolving
the uncertainty.

Mr Munro was employed by MPB Structures at its site in Edinburgh and was
paid at a rate of £8.50 per hour. At the same time as accepting an increase
in pay to £10 per hour, Mr Munro signed a contract in which it was stated
that his rate of pay incorporated an 8% allowance for his holiday pay.

The main question for the court was whether the payment of holiday pay as
part of a weekly rolled up rate was lawful or whether the holiday pay must
be paid when the leave is taken. In interpreting the regulations, the court
considered the Working Time Directive. It held that it was clear that the
Directive treats the right to annual leave and to payment for it as part of
a single entitlement which itself was supported by the intention of the
Directive to protect the health and safety of workers. The legislators who
drew up the Directive want workers to take holidays. With this reasoning,
the court held that it was essential not only that payment should be made
for annual leave but also that it should be made in association with the
taking of that leave. The rolling up of holiday pay would have the effect of
discouraging workers from taking their holiday and therefore conflicted with
the regulations.

The court concluded by finding that the contractual provision which
attempted to roll up the worker's holiday pay was void. The rate of pay did
not discharge the company's liability in respect of the employee's holiday
pay and could not be off-set against it.

The extent to which this decision is binding on tribunals in England is
uncertain. The risk to employers of being confronted with substantial claims
is however very real. A worker may be able to bring a claim for unpaid
holiday dating back to the introduction of the regulations in October 1998
by utilising the statutory provisions for the unlawful deduction of wages.
Employers who do operate a system of rolled up holiday pay should reconsider
the advantages of doing so.

Rachel Urquhart
13 May 2003
158

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