I am Finance Director for a small advertising agency in London and have responsibility for HR issues.  As part of our work, we frequently engage workers (such as models, photographers, make-up artists etc.) on short term contracts of only a week or two.  For administrative reasons, we have always paid these workers an additional daily amount over and above their normal daily fee, by way of rolled up holiday pay.  We have a new project starting in a few weeks time and I am about to finalise the contracts for the workers involved, but have heard on the grapevine that such rolled up holiday pay arrangements are now illegal – is this true?!!

Yours in anticipation,

About to have a hernia over holiday pay

Dear About to have a hernia,

Notwithstanding a number of cases challenging the lawfulness of the practice, rolling up holiday entitlement was always a simple and practical way of dealing with holiday entitlement for short term workers.  However, following a recent European Court of Justice decision, the days of rolled-up holiday pay are now numbered…

As you are aware, under the Working Time Directive (the “Directive”) incorporated into UK law by the Working Time Regulations (the “Regulations”), all workers are entitled to take annual leave, and are entitled to be paid for their holidays.  Due to the practical difficulties faced by businesses in such industries such as yours who engage numerous workers on short term contracts, workers are often paid an element of holiday pay in their normal daily rate.  If such an individual wishes to take holiday during the duration of the contract, he would have already received advanced pay for such period (unless the worker takes more holiday than has accrued at the date leave is taken, in which case the employer could be obliged to pay the balance).  Alternatively, if the individual chooses not to take such holiday, these payments would discharge the employers’ liability to pay accrued holiday pay upon the termination of the contract.

Why is rolled up holiday pay problematic?

The issue of holiday pay has proved a legal minefield. Prior to the ECJ decision, there were two recent conflicting authorities on whether or not rolling up holiday pay complied with the Regulations. In MPB v Munro, the Court of Session (the Scottish equivalent to the Court of Appeal), held that hourly or weekly rates of pay which expressly ‘roll up’ holiday pay do not comply with an employer’s duty to pay holiday pay.

However, in a very helpful and detailed judgment of the Employment Appeals Tribunal ( the “EAT”) in Marshalls Clay Products Ltd v Caulfield (& others ) the EAT set out the exact circumstances in which employers could roll up holiday pay. The EAT specifically considered the application of the Regulations for workers who freelance and do not expect to stay with the same employer on a long-term basis.  It acknowledged the administrative inconvenience upon employers to keep precise records of time worked by such transient workers, in order to calculate holiday pay, and the fact that if such practices are overruled, then workers would, in effect, benefit from double recovery of holiday pay. Guidance was issued as to how to ensure compliance with the Regulations – these set out the means by which the holiday pay element of a worker’s salary would be transparent and a true addition to pay.

Marshalls Clay was of great practical benefit to employers in industries where large numbers of workers are engaged on short-term contracts (such as the advertising and television industries), giving clear guidance to be followed.

A new set of rules?

In March 2006, the ECJ made a ruling on the lawfulness of holiday pay, which has changed the legal landscape on the issue and the consequences of which have divided practitioners. In the combined cases of Robinson-Steele and Caulfield, the ECJ made the categorical decision that the rolled up method of paying holiday pay is unlawful in any circumstances. In the ECJ’s view, workers’ pay should continue throughout the holiday period. The ECJ held that the entitlement to paid annual leave was an important principle and that holiday pay was intended for the worker to actually take holiday. Unfortunately, unlike in Marshalls Clay, the ECJ did not consider the practicalities of doing so for employers who regularly hire workers on short-term assignments. For industries who normally hire people for specific, short-term projects, the ECJ decision signals an important turning point in payment of workers, since paying rolled up holiday pay is now considered unlawful – despite the inevitable administrative headaches that this will cause.

Every cloud has a silver lining…

However, the impact of the Robinson-Steele and Caulfield judgment was mitigated (at least in the short term) by virtue of another part of the ECJ’s ruling.  Helpfully, the ECJ took the view that whilst rolled up holiday pay was unlawful, it did consider that payment received by workers who had been paid under a system of rolled-up pay in a way which was ‘transparent and comprehensive’ (which therefore complied with the guidelines previously set out in the Marshalls Clay judgment), could be set off against the payment for specific leave.

What are the consequences of the recent ruling?

Although, on the face of it, all rolled up holiday pay is now unlawful, the ECJ’s express ruling that credit can be gained for rolled up payments already made means that payments made in accordance with the previous guidelines could be set off against the worker’s entitlement when they actually take their leave. Consequently, employers who have made payments in this way will be unlikely to suffer a financial penalty for their failure to comply with the new judgment. Therefore, practically, for the purposes of your current project, you can continue with the previous system of rolling up holiday pay.

For how long can you continue as before?

The ability for employers to continue with a transparent and comprehensive system of rolling up holiday pay is, however, likely to be short lived.  The ECJ specifically stated in its judgment that “Member States are required to take measures appropriate to ensure that practices incompatible with Article 7 of the Directive [i.e. rolled up holiday pay] are not continued”. 

In light of this clear guidance, the UK Department for Trade and Industry has already amended its guidance on the Regulations stating that “employers should renegotiate contracts involving RHP for existing employee/workers as soon as possible so that payment for statutory annual leave is made at the time when the leave is taken”.

Given such clear guidance, you should start to seriously consider alternative ways for dealing with the issue of holiday pay for your short-term workers. It is likely that the UK Government will amend the Working Time Regulations in due course in accordance with the decision, ruling out any possibility for employers to continue to roll up holiday pay.

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