Holiday pay headache for employers

by Natalie Ruane

The latest article on holidays and holiday pay can be found here.

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An important principle of EC law is that every worker is entitled to four weeks paid annual leave.  This seems a straightforward concept and yet it has led to much litigation and debate. 

“Rolled Up” Holiday Pay

The most important issue which has been dealt with by recent case law has been in relation to “rolled up” holiday pay.  This is where an employer agrees with a worker that holiday pay is included in their hourly rate of pay.  The employer then does not pay the worker in respect of a specific period of leave actually taken.  In other words, a percentage is added to the workers hourly rate throughout the year but the worker receives no pay when he is not working and on holiday.

This system has been widely used in relation to hourly paid staff as it is administratively convenient where workers hours fluctuate.  The practice has however been criticised because it discourages employees paid on an hourly basis from taking their holidays.  The more they work, the more they get paid.  But no pay is received if they take holiday.

Last year, the Employment Appeal Tribunal (EAT) held that employers were entitled to roll up holiday pay, provided that the percentage paid in addition to the workers normal hourly rate was clearly identifiable for example by clearly showing it on the worker’s payslip and in their employment contract and that it was a true addition to that workers normal pay.

However, three cases were recently referred to the European Courts of Justice (ECJ) on whether this practice was in fact lawful in accordance with European law.  The ECJ has ruled that the payment of rolled up holiday pay is unlawful.  They said that this practice discourages people from taking their holidays and may lead to employers paying in lieu of statutory holiday (which is not allowed).  The practice can therefore no longer continue.  However, in order to accommodate employers who have this practice in place for this holiday year, the ECJ said that payments already made can be set off against payment due in respect of a specific leave period, so long as the payments are made in a transparent and comprehensible way.  Employers currently paying rolled up holiday pay can therefore continue this practice during this holiday year for administrative convenience.  However, it may be necessary to consider an alternative method for future years.  Whilst the ECJ has said that payments can be set off against holiday pay due, member states have to take measures to ensure that practices incompatible with EC law are not continued.  It is therefore highly likely that we will see a change in the law to outlaw rolled up holiday pay in the future.  Employers therefore need to consider removing the holiday pay element from workers hourly rate and instead calculate holiday pay due when a worker actually takes his/her entitlement to leave.

Pay in Lieu

Two further cases dealing with issues surrounding holiday pay have hit the headlines in recent months.  One of these dealt with the issue of payment in lieu of statutory holiday.  This was a Dutch case, also referred to the ECJ.  In Holland, employees were allowed to carry over statutory holiday and could cash it in the following year.  The ECJ made the point that the positive effect of allowing employees leave is maximised if the holidays are taken in the holiday year in which they are due.  However, holidays still have a positive effect if it is taken later.  Therefore, employees are entitled to carry over holiday but if employers are prepared to pay them in lieu of untaken holiday, this creates an incentive not to take it and receive the cash instead.  This is contrary to European law.  The ECJ therefore ruled that it is unlawful to replace the minimum four weeks paid holiday with pay in lieu, even where the holiday year has expired and the holiday allowance carries over to the next year.

Part-time workers

The final case on holiday pay was a case decided by the EAT regarding the entitlement to Bank Holidays in respect of part-time workers.  A part-time worker, Mrs M worked for a business which operated seven days a week.  Mrs M worked on Wednesdays, Thursdays and Fridays only.  She claimed that she suffered a detriment due to her being a part-time worker because she did not receive time off to compensate for the fact that, due to her not working Mondays, she missed four Bank Holiday days per year.  The EAT ruled that she did indeed suffer a detriment, but this was not due to her part-time status.  It was simply because she did not work Mondays.  Full-timers who did not work on Mondays (this being a seven day a week business) also did not get time off and therefore Mrs M’s predicament was not due to her being part-time.  It is noteworthy that the EAT emphasised that their decision was based on the fact that the employer operated a seven day a week business.  It is highly likely that the situation would have been different for an employer who operated five days per week, where all full-time staff were given Monday Bank Holidays off work.  In a five day week business, it is advisable to pay part-time staff on a pro rata basis for Bank Holidays to ensure that they do not suffer detriment due to their part-time status in respect of Bank Holidays.

National Minimum Wage

The National Minimum Wage rises on 1st October 2006 from £5.05 to £5.35.  The rate for 18-21 year olds increases from £4.25 to £4.45 and the rate for 16-17 year olds goes up from £3.00 to £3.30.  The accommodation offset rate (the amount which employers are allowed to deduct for providing accommodation) also increases from £27.30 to £29.05 per week.

Finally, from 1st October 2006, statutory maternity, paternity and adoption pay increases from £106 to £108.85 per week.  Statutory sick pay also goes up from the same date from £68.20 to £70.05 per week.

Natalie Ruane is an Associate Solicitor at Burnetts in Carlisle. For further information on holiday pay or the national minimum wage, contact Burnetts’ Employment Law team on 01228 552222.

Jul 2006