Under the Working Time Regulations 1998, all workers are entitled to a minimum of 4 weeks’ holiday. The regulations state that for each week of holiday, the employer must pay the individual one week’s pay. A practice has developed of including an element of holiday pay in an individual’s salary, sometimes known as “rolled up” holiday pay. This means that the employer does not have to pay an individual at the time he or she is on holiday.
The regulations apply to all workers, not just employees. In the film and television industries, there is a long tradition of engaging freelancers, who are not employees of the production company. The agreed rates were deemed to include an element of holiday pay. It is tempting for production companies to continue this practice and provide for rolled up holiday in the agreements they enter into with production staff.
Until recently the legitimacy of rolled up holiday pay was unclear, the Court of Appeal in Gridquest v Blackburn (2002) having declined to make a finding on the issue. However, a decision last month of the Scottish Court of Session, MPB Structures Ltd v Munro, has gone some way towards resolving the uncertainty.
Mr Munro was employed by MPB Structures at its site in Edinburgh and was paid at a rate of £8.50 per hour. At the same time as accepting an increase in pay to £10 per hour, Mr Munro signed a contract in which it was stated that his rate of pay incorporated an 8% allowance for his holiday pay.
The main question for the court was whether the payment of holiday pay as part of a weekly rolled up rate was lawful or whether the holiday pay must be paid when the leave is taken. In interpreting the regulations, the court considered the Working Time Directive. It held that it was clear that the Directive treats the right to annual leave and to payment for it as part of a single entitlement which itself was supported by the intention of the Directive to protect the health and safety of workers. The legislators who drew up the Directive want workers to take holidays. With this reasoning, the court held that it was essential not only that payment should be made for annual leave but also that it should be made in association with the taking of that leave. The rolling up of holiday pay would have the effect of discouraging workers from taking their holiday and therefore conflicted with the regulations.
The court concluded by finding that the contractual provision which attempted to roll up the worker’s holiday pay was void. The rate of pay did not discharge the company’s liability in respect of the employee’s holiday pay and could not be off-set against it.
The extent to which this decision is binding on tribunals in England is uncertain. The risk to employers of being confronted with substantial claims is however very real. A worker may be able to bring a claim for unpaid holiday dating back to the introduction of the regulations in October 1998 by utilising the statutory provisions for the unlawful deduction of wages. Employers who do operate a system of rolled up holiday pay should reconsider the advantages of doing so.