A number of employers in the construction industry have adopted a practice of using ‘rolled up’ holiday pay arrangements as a means of providing paid annual leave for their workers. This practice has been challenged as amounting to a breach of the Working Time Directive and the issue is currently being considered by the European Court of Justice (‘ECJ’). The key test case referred to the ECJ is the case of Caulfield v Marshalls Clay Products, in which Pinsent Masons are advising Marshalls. The ECJ's ruling is likely to have a significant impact on the way many in the construction industry address the issue of holiday pay.Yesterday the Attorney General's opinion gave a clear indication that rolled up holiday pay schemes may be lawful subject to meeting certain criteria.

The Advocate General's opinion was published recently and although it does not have to be followed when the ECJ comes to make its decision in a few months time, history suggests that the Advocate General's opinion is generally adopted in most cases.

Essentially, the arrangements under scrutiny are those where employers agree to pay workers by the hour and add to their hourly rate of pay a specified percentage for holiday pay. The worker therefore agrees to receive holiday pay on an ongoing basis throughout the year but does not receive a separate payment as and when leave is taken - indeed the worker may not formally take any particular period of leave, but is, by agreement, treated as being on holiday when he or she is not working. Payment of holiday pay through this ‘rolled-up’ hourly pay system is administratively convenient for employers as they do not have to specifically calculate holiday pay every time a worker takes leave, which is especially beneficial for the employer in circumstances where hours of work (and therefore amounts of pay) fluctuate throughout the year. However the system has been criticised as discouraging workers from taking holiday, particularly as the more work the individual carries out the more pay they earn during the year.

There is a conflict in existing UK case law as to whether such a practice is lawful, though the EAT in the Marshalls case concluded that it could be. In particular, it observed that in order to minimise the risk of a rolled-up holiday rate being in breach of the Regulations, employers must take a number of steps including clearly incorporating rolled up holiday into the individual contract of employment and clearly identifying the allocation of the percentage or amount of holiday in the employment contract, and preferably also in the worker's pay slip.

The Advocate General's Opinion

In essence, the Advocate General appears to have agreed with the EAT that rolled-up holiday pay arrangements can be lawful provided that the precise proportion of holiday pay is shown in a transparent fashion. However, the Advocate General went on to clarify that this would only be the case if the employer also has contractual arrangements in place to ensure that workers can take the minimum 4 weeks annual leave they are entitled to by virtue of the Directive, the concern being to ensure that workers who are paid rolled-up holiday pay are not, in practice, deterred from taking leave due to pressures such as the desire to continue working to earn extra income. Whilst this approach is likely to be great news for the employers in the construction industry already operating a rolled-up holiday pay scheme (as well as those that are minded to adopt such a scheme in the future), the Advocate General's opinion, if adopted by the ECJ, does appear to place an onus on employers to ensure that workers take their full holiday entitlement. How to force a worker to take their holiday will be the next practical problem that the those adopting such a scheme may need to address.

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