Holiday Pay - update on regulations
Clarification of Rights to Annual Leave and Holiday Pay
In two recent decisions, the European Court of Justice (“ECJ”) has ruled that it is unlawful to pay rolled-up holiday pay or to make a payment in lieu of untaken statutory minimum annual leave.
The European Working Time Directive, as incorporated into UK law by the Working Time Regulations 1998, protects workers’ health and safety by guaranteeing minimum rest breaks and annual leave.
It gives all workers the right to take four weeks paid leave each year. The ECJ has now emphasised the importance of this right and has clarified the extent of workers’ entitlement to annual leave and holiday pay.
Payment in Lieu of Annual Leave Unlawful
In Federatie Nederlandse Vakbeweging -v- Staat der Nederlanden, the ECJ has clarified that where a worker does not take their statutory minimum annual leave during a leave year, they cannot be given a payment in lieu of untaken annual leave in a subsequent holiday year.
If statutory minimum holidays are untaken in a holiday year, they may in some situations be carried forward to the following year. However, they cannot be replaced by a payment in lieu of those untaken holidays. They must be taken in the following year.
Payment in lieu of untaken annual leave is only allowed upon termination of employment.
Rolled-Up Holiday Pay Unlawful
In Caulfield and others -v- Hanson Clay Products Limited and others, the ECJ has clarified that it is unlawful to pay rolled-up holiday pay.
It was held that the right to holiday pay is intended to enable workers to take the annual leave that they are entitled to. Therefore payment in respect of annual leave must be genuinely additional to normal remuneration for work done.
The ECJ held that the practice of paying rolled-up holiday pay was unlawful because it may lead to situations where a worker’s entitlement to annual leave was replaced by a payment in lieu of annual leave.
In practice, however, the decision is expected to have a limited effect. This is because the directive allows an employer to make genuine and transparent payments of holiday pay in addition to normal remuneration throughout the holiday year. The burden of proof to show that such payments are genuinely additional to normal remuneration will be on the employer, but if the employer can show that they are, then the employer is entitled to set off those payments against a worker’s right to payment for annual leave.
The Department of Trade and Industry has now announced that it will publish updated guidance on rolled-up holiday pay in the near future. The government does not intend to amend the Working Time Regulations in light of this decision.
Importance of annual leave for protection of health and safety
In both cases, the ECJ emphasised that the purpose of the Working Time Directive was to establish minimum health and safety requirements for working time. The right to four weeks paid leave is designed to ensure workers take actual rest, for the protection of their health and safety. There are no exceptions to a worker’s right to a minimum period of four weeks paid annual leave.
The possibility of rolled-up holiday pay or a payment in lieu of untaken statutory minimum annual leave may act as an incentive or may encourage workers’ not to take annual leave. The ECJ held that such incentives would be incompatible with the purpose of the directive, and were unlawful.
For further information please contact: Alison Gow