Veitch Penny LLP - Exeter | Crediton, Devon

Case

Robinson-Steele v R D Retail Services Ltd
European Court of Justice - (16 March 2006)

Issues

1) Working Time Regulations 1998 ("the Regulations")
2) Annual Leave
3) Rolled-up holiday pay

Facts

Three separate sets of proceedings involving the same set of facts were referred to the European Court of Justice. They had the common feature that in the contracts involved, the hourly or daily pay of the claimant employees either expressly included an amount of annual leave, calculated as a proportion of the employees' annual entitlement' or was stated to incorporate holiday pay known as "rolled up" holiday pay. In practice, paying holiday in this way means that employees are given an additional payment during the weeks that they work in respect of their annual leave rather than receiving a separate payment when they actually go on holiday. This is often used by employers who have temporary, seasonal or shift jobs. This means that employers can avoid having to calculate the holiday pay due to each worker for each particular period of leave which in practice is a complex exercise. Many employers consider this to be a disproportionate drain on administrative resources.

The cases were referred to the European Court of Justice in order to seek a ruling on whether such rolled-up holiday pay was consistent with Article 7 of the Community Working Time Directive, despite being permitted under national legislation in the form of the Regulations and provided for in contracts of employment.

They argued that by making a payment in addition to their normal salary, it discouraged workers, particularly those in low paid jobs, from taking their holiday entitlement. The fewer holidays they took, the more remuneration they received.

Initially, the Scottish Court of Session decided that rolled-up holiday payments were void because they limited the effect of the Regulations. However, when the matter was referred to the Employment Appeal Tribunal (EAT) a different view was reached. The EAT suggested that rolled-up holiday payment could be acceptable as long as the annual holiday pay was genuine and that certain further safe-guards were in place. This led to the reference to the European Court of Justice.

Decision

The European Court of Justice has now found that the practice of rolling-up holiday pay is unlawful. It found that holiday pay cannot be entirely rolled-up into remuneration and it must be identifiable as a separate sum. The court found that "the Directive precludes the payment in respect of minimal annual leave from being made in the form of part-payments staggered over the corresponding annual period of work and paid together with the remuneration for work done, rather than in the form of a payment in respect of a specific period during which the worker actually takes leave". This is in line with the Scottish Ruling.

Comments

The European Court of Justice's decision is pragmatic in that having ruled that the rolled-up method of holiday pay was contrary to the Directive, the judgment is not retrospective in effect. The Court went on to find that genuine rolled-up holiday payments already made could be set off against a worker’s entitlement to payment when he/she actually takes leave, as long as the payment was made "transparently and comprehensively". By making this statement, the court is allowing employers a dispensation where payments have already been made so as to avoid a situation where employers who had already made genuine holiday payments being forced to make the payments twice.

This means that where employers can show that their rolled-up holiday payments are genuine, transparent and comprehensible, they will not face any significant financial penalty if they continue. Furthermore, this would give employees little incentive to make claims particularly given that claims for unpaid holiday pay must genuinely be brought within three months of the end of the worker's contract but at the end of the relevant holiday year. The advice for employers in the meantime is to ensure the payments which have already been made are made transparently and comprehensively by showing that the holiday pay element of any hourly rate is set out in the contract and also in any payslips etc.

However, the Judgment reminds Member States that they are required to take the measures appropriate to ensure that practices incompatible with the Directive are not continued. When the case returns to the Court of Appeal we can therefore expect it to construe the Working Time Regulations in accordance with this judgment and rolled-up holiday pay will be regarded as unlawful without the Regulations being amended by the Government. In view of this, the DTI has now changed its guidance to read:

"Following the European Court of Justice Judgment on 16 March 2006, Rolled-Up Holiday Pay (RHP) is considered unlawful and employers should re-negotiate 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 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".