Holiday pay – what options do you have?

The European Court of Justice found in March that payments for minimum annual leave through a system of rolled-up holiday pay are contrary to the Working Time Directive 1993 (implemented in the UK as the Working Time Regulations 1998), and therefore unlawful.

The basis of this decision lies in the fact that the directive was introduced primarily as a health and safety (rather than employment law) measure. The aim of the directive was to improve people’s wellbeing, and minimise accidents and ill-health caused by overwork. Accordingly, the ECJ took the view that even where a worker appears to have agreed to an arrangement where they are paid rolled-up holiday pay, it effectively discourages people from taking their holiday.
However, the judgment may not have as many immediate implications for recruitment companies as you might think.

This is because while the ECJ judgment appears to ban rolled-up holiday pay, it does allow sums that are paid “transparently and comprehensibly” on a rolled-up basis to be set off against the sums that the worker subsequently claims for specific leave taken. This means any worker who brings a case will win it, but in many cases will probably be awarded nothing.

So, a recruitment company should consider whether it wants to use this “work round” by making rolled-up holiday payments on a transparent and comprehensible basis.

What steps should you take?
Ensure the payment of rolled-up holiday pay is covered clearly in the agency worker’s contract. The individual should sign a document confirming they understand and are happy with the arrangement.

In addition, the percentage and amount of payment for holiday pay must be clearly identified in the worker’s contract and on all payslips. It must be very clear in the contract and on the payslips, that the holiday pay is an addition to the worker’s contractual rate of payment. Furthermore, workers should keep accurate records of holiday taken for each holiday year.

Ensure holiday is taken
In practice, this can be very difficult. However, provided the recruitment company can demonstrate it has taken reasonable steps to encourage holiday to be taken, this may be sufficient. Remember, if a worker suffers injury on the job, or ill-health, and ‘over worked’ is shown to have been a cause, the recruitment firm may be deemed to have caused the injury and face a damages claim.

Of course, even though rolled-up pay is paid “transparently and comprehensively”, doing so is still technically a breach of the law and there are some circumstances where the work round will not apply.

Many companies may wish to find an alternative means of complying with the regulations now, such as providing holiday vouchers, stamps or savings schemes so each worker has a voucher per working day, and these can later be exchanged for paid holiday. This method would ensure that workers only receive paid holiday in relation to the work they have done.

Other recruitment companies are operating a system in which they record holiday, reserve the holiday pay element, and then pay the holiday pay when holiday is taken. Some firms have asked us if they can treat days in which the worker is “on call” but not actually working (and the client is not paying for the recruitment company) as “holiday”. The answer will depend on the circumstances, but will often be no. Needless to say, any new scheme should be reviewed by solicitors to ensure it complies with the ECJ ruling.

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