Advocate General gives cautious approval to rolled-up holiday pay

United Kingdom

Can a worker's right to be given paid annual leave under the Working Time Directive be satisfied where the employer spreads holiday pay throughout the year as part of normal wages?

This has been an area of dispute in the UK in light of opposing decisions of the Scottish and English courts.

However, the Advocate General of the EU has, in the past few days, provided the first indication that such "rolled-up" holiday pay arrangements may be found to be lawful by the European Court of Justice when it considers this issue in the next few months.

The Advocate General's opinion results from a combined referral to the ECJ for clarification on the meaning of the Working Time Directive after conflicting UK decisions on the issue. In Scotland, the Court of Session held, in the case of MPB Structures v Munro, that holiday pay must be paid when the period of holiday is actually taken in order to comply with the Working Time Regulations. However, the English EAT, and subsequently the Court of Appeal, decided differently. In the case of Marshalls Clay Products Limited v Caulfield, the Court of Appeal approved the legitimacy of rolled up holiday pay, provided that certain specific criteria were met.

The issues referred can be summarised as follows:

  1. Does a contractually binding rolled up holiday pay arrangement violate a worker's rights under the Working Time Directive? Is it necessary, to comply with the Directive, to pay for holidays in the pay period during which they are taken?
  2. Is there any difference if the worker was paid the same before and after the rolled up arrangement came into force i.e. the effect of the arrangement was only to attribute part of the wages already payable to the worker to holiday pay?
  3. If rolled up holiday pay is not permissible, can employers receive credit for payments already made in this way?

The workers' argument was that payment must take place while the worker is on annual leave for the right to be effective. They argued that having to save up for leave would be a deterrent, particularly for low paid workers, as would the fact that more could be earned by working every week and not taking leave. The respondents in the main proceedings argued to the contrary, suggesting that so long as there was payment it would not conflict with the wording or purpose of the Directive to structure it in this way. The UK Government, who submitted observations, supported this view.

The Advocate General's opinion, having considered the arguments, is that rolled up holiday pay can be lawful and consistent with the Directive's objectives, but if there are clear systems in place to ensure that the workers affected actually take holidays. It would be for the national courts to examine in each case whether workers have an effective possibility of taking annual leave. This qualification may be a real practical difficulty for employers who have thus far addressed the issue of pay but not leave.

Dealing with the second question above, the opinion re-confirms the position set out in Marshalls Clay that for rolled up holiday pay to be effective there must be a genuine increase in the rate of pay to take account of the holiday element. Moreover, that breakdown must be sufficiently transparent for the worker to be able to see what amount is holiday pay. Helpfully for employers, however, the Advocate General has confirmed his view that, where a particular arrangement does not comply with the Directive, this should not prevent the employer from receiving credit for sums already paid to workers under that arrangement.

It is for the ECJ to make a preliminary ruling on the referred questions and it may be some months before its decision is issued. However, while it will not be bound by the Advocate General's opinion, it is generally the case that significant weight is given by the Court to his view. The many employers affected by this issue will be hoping that this is the case in this instance.