Clarifying the holiday pay minefield

The question of whether employment agencies in the UK are allowed to pay their workers on a rolled-up basis (in other words, whether an element for holiday pay is included with each weekly or monthly payment to the worker) is one which has caused a great deal of confusion for all concerned - including the courts. However this confusion is now one step nearer to coming to an end.

The current position is confused because of differing Court decisions made in Scotland and England.

In Scotland is has been held unlawful to pay for holidays on a rolled-up basis. This is because the Scottish Court of Sessions (their equivalent of the Court of Appeal) has long taken the view that pay should be provided at the time holidays are taken in order to ensure that the worker is not deterred from taking the holiday. If payment is made with each pay packet, the argument is that the pay does not really represent a payment for a holiday but instead is an inducement not to take a holiday.

According to the Court, this counters the intention of the Working Time Regulations and also offends the principles of the Health and Safety Directive.

In England, the Court of Appeal has taken the wholly opposite view. Rolled-up pay is lawful provided that the terms are clearly set out in the contract with the worker, the amount attributable to holidays is shown separately in the contract and pay packet and workers are encouraged to take holidays.

However the last act of the English Court of Appeal was to refer the disparity between its decision and that of the Scottish Court to the European Court of Justice (ECJ) for a definitive ruling.

The first serious glimmer of hope that rolled-up pay will be permitted by the ECJ became available recently. On 27th October 2005 the advocate general of the ECJ issued his opinion, one which is very much in line with the ruling of the English Courts.

The opinion suggests that rolled-up holiday pay will not breach European laws as long as employees or workers are actually taking the leave and are receiving holiday pay - whether at the time or in advance. The arrangement must be very clear, with the amount paid being recorded clearly on payslips and the actual time taken off also recorded.

The decision as to whether this is happening will be for individual UK courts and tribunals.

But it must be noted that this is only a provisional opinion and the ECJ's final decision will not be issued for several months. Nevertheless, it is a positive step and one which the courts are more likely than not to follow.

However assuming that the European courts do follow this opinion, those who already adopt a policy of rolled-up holiday pay should not simply relax and assume that what they are doing is fine.

Every employer of agency workers needs to carry out a thorough review of policies and procedures to ensure as far as possible that in their case rolled-up holiday pay will be allowed.

However the decision does provide some relief for those who were worried at the possibility that many workers being paid on a rolled-up basis could have a claim for retrospective holiday pay, as threatened by some unions.