England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM EMPLOYMENT APPEAL TRIBUNAL

		Royal Courts of Justice Strand, London, WC2A 2LL
		28th April 2004

Lord Justice Laws:

INTRODUCTORY

1. These two appeals, which the court has heard together, raise an important question about the impact of the Working Time Directive 93/104/EC ("the Directive"), which has been transposed into the law of the United Kingdom by the Working Time Regulations ("the Regulations"). At this stage I may state the issue in summary form: do contractual arrangements between employer and worker which provide for "rolled-up" holiday pay involve a violation of the worker's right to paid annual leave under Article 7 of the Directive? I shall explain the issue more fully below.
2. Mr Hogarth QC for the appellant workers in both appeals sought to raise another issue, as to the duty or otherwise of the Employment Appeal Tribunal ("the EAT") sitting in England to follow a decision of the Inner House of the Court of Session on a point concerning the construction of legislation which applies without distinction in both the English and Scottish jurisdictions. This point was not taken below and so is raised for the first time here.
3. Both appeals are brought against a composite judgment of the EAT, determining appeals from the Employment Tribunal ("ET"). The judgment was delivered by the President, Burton J, on 24 July 2003 with permission to appeal to this court given by the EAT itself.

THE FACTS

4. It is convenient to describe the facts of the two cases before turning to the statutory materials and an explanation of the issues.

Caulfield

5. The employers, Marshalls Clay Products Ltd (respondents to the appeal: I shall refer to them as "Marshalls Clay"), carry on business manufacturing clay products for the building trade. The appellants were employed by them as "general operators". In 1984 Marshalls Clay introduced a continental shift system, which meant that the employees each worked four days on and then four days off. The factory where they worked, at Accrington, has at all relevant times been in operation seven days per week except for Christmas Day and Boxing Day.
6. This pattern of working required particular arrangements to be made in order to cater for the employees' holidays. That was achieved (following a meeting between Marshalls Clay and the trade union, the GMB) by means of a local collective agreement which was entered into on 9 July 1984 and incorporated into each employee's contract of employment. It contained this provision:

"3. HOLIDAYS

Holiday pay is incorporated in the hourly rate of pay, so there is no accumulation of holiday pay. Holidays are taken during the rest day periods in the rota system. In order that extended periods of leave can be accommodated, each person will be entitled to:-

two 8 consecutive day periods

and

one 16 consecutive day period.

These periods will be agreed locally. (This means that when one shift takes a period of leave, whether 8 days or 16 days consecutively, the other shift will be working.)"

I should refer also to an earlier document, compiled on 29 May 1984, which as I understand it came into existence in the course of negotiations between Marshall Clay and the union. The following passage describes the proportion of the employee's hourly rate of pay which represents holiday pay. The collective agreement (as I have just recited) provided that holiday pay was to be incorporated in the hourly rate of pay, and the proportion referred to in the May document survived, as I understand it, into the concluded agreement:

"Presently, Accrington operatives enjoy 31 days' holiday pay per annum (for 29 days' holiday). As a proportion of the other days worked (232) this is 13.36%. Hourly rates include 13.36% holiday pay."

7. The EAT described the effect in practice of these contractual arrangements in the following passage, whose accuracy is not in question save for a new submission by Mr Hogarth with which I will deal below (paragraph 24):

"17. The result is therefore that holidays are taken by the employees as part of their four out of every eight days throughout the year: i.e. excluding 52 times two days as the equivalent of weekends and two days for Christmas and Boxing [or New Year] Days, approximately one quarter of 363 are available as holidays or as (non-weekend) rest days. Employees (by arrangement) can, but do not have to, take consecutive days of two lots of eight days or one lot of sixteen days, but only by pooling or collecting their rest days and, by a mutually agreed series of exchanges, working other people's shifts. The further collective agreement, similarly so agreed with the unions, is that the hourly rates include 13.36% for holiday pay.

18. The result is as follows:

i) The employees are paid on the basis that they are only paid on the four days that they work, but not on the four days that they do not work. The hourly rate that they are paid is increased to include for paid holidays, and there is thus flexibility as to when and how they take the holidays.

ii) The hourly rates apply to overtime also, so that in fact if and when the employees work overtime they receive (depending on the precise time or times worked, which also forms part of the collective agreement) rates of 30%, 50% or 100% extra, in respect of both basic rate and holiday pay.

iii) It is as a result of this flexible arrangement, which suits both employers and employees, never clear when the 'days off' are in fact going to be paid holiday, as opposed to rest days:

(a) Any day could, at the employee's option, either turn out to be an 'unpaid' rest day or a 'paid' holiday.

(b) An employee could work other people's shifts early in the year, in order to collect days to take consecutively, or could initially intend to take his or her days off as holidays, but later in the year decide to take some consecutive days, and rework accordingly."

8. Each of the appellants in Caulfield took a holiday in June 2001. The periods varied, up to 16 days. They also took rest days. Miss Eady for Marshalls Clay points out, and again I understand this to be undisputed as a matter of fact (Miss Eady's skeleton, paragraph 5(b): taken from paragraph 3(viii) of the ET's Extended Reasons):

"Under [Marshalls Clay's] shift arrangements, the appellants were each rostered to work 182 days per year. Pursuant to the collectively agreed terms relating to holiday pay, 13.36% of the appellants' pay was in respect of holiday. In other words, for working 182 days per year, each appellant received 24.32 days holiday pay: within each £7.515 paid per hour worked, £6.629 related to the time actually worked and 88.6p constituted the up-lift or addition to take account of holiday pay."

Clarke

9. Here the facts are somewhat less convoluted. The employers, Frank Staddon Ltd ("Frank Staddon") carry on business in the construction industry. The appellant worked for them as a hod carrier/brick cutter, acting as a sub-contractor under what is known as a "CIS" ("construction industry scheme") contract. We were told by Mr Gallagher, who represented Frank Staddon as a director of the company, that this scheme was agreed with the Inland Revenue and operated (as he put it) as an alternative to Pay-As-You-Earn. Apparently some 50% of Frank Staddon's operatives were at the material time on CIS contracts. We are not of course concerned with the tax ramifications of such arrangements. What matters for present purposes is that a worker in this appellant's position, even if his contractual status is properly characterised as that of sub-contractor rather than employee or servant, enjoys the rights conferred by the Directive and Regulations.
10. The appellant's contract stipulated:

"All Holiday and Bank Holiday pay is included within the daily rate."

The same document contains a manuscript annotation against the words "RATE OF PAY":

"Basic 8.689 Holiday .756 = £85 per day."

There was also, as the EAT noted (paragraph 41(i)), a payslip apparently dated August 2001 which showed the same breakdown.

11. It seems that the appellant worked for Frank Staddon from 2 April 2001 until 23 June 2001. He was then on holiday until 24 July 2001 when, to use what I intend as a neutral term, he went back to work with the company. He was not paid between 23 June 2001 and 24 July 2001. The rate of £85 relates only to the period commencing on 24 July 2001. The daily rate on 2 April 2001 had been £80, increasing to £82-50 in June. It seems that Frank Staddon did not provide the breakdown relating to the amount of holiday pay included in the daily rate before August 2001.
12. The ET found that there was a break in the continuity of the appellant's CIS contract occasioned by the period when he was on holiday between 23 June and 24 July. He was not obliged to return to work after his holiday, nor were Frank Staddon obliged to take him back. Thus the parties entered into a new CIS contract on 24 July. This would affect the quantum of any recovery the appellant might obtain if he established a violation of the Directive/Regulations, but does not touch the issue of principle in the case relating to "rolled-up" holiday pay.
13. The EAT ordered that Clarke be referred back to the ET on two issues. The first was whether there had in fact been before August 2001 any attribution to holiday pay of a percentage or proportion of the daily rate. The second concerned the question whether there had been a break in the appellant's employment: in particular whether, if there was a rolled-up holiday pay provision in the appellant's contract for the period April to June, that might have had legal effects for the period between 23 June and 24 July when the appellant was on holiday.
14. It will be obvious what the two sets of facts have in common. In each the contractual scheme was such that, while the employees enjoyed an entitlement to paid holiday, they were not paid and had no right under their contracts to be paid during any actual holiday period or in such a way as was referable to any specific holiday period. The entitlement to paid holiday was met (or purported to be met) by an enhancement to the ordinary rate of pay, whether calculated by the hour or the day or however calculated. This is what is called "rolled-up" holiday pay. The essential issue in these appeals is whether such an arrangement falls foul of the Directive and/or Regulations. I have said that under both schemes the workers were entitled to paid holiday: I have not forgotten Mr Hogarth's submission that on a proper application of the law to the facts the contractual arrangements in Caulfield allowed for no annual leave at all. I shall explain in due course why I have concluded that that is wrong.

THE DIRECTIVE

15. The argument below, in the ET and the EAT, proceeded by reference to the terms of the Regulations. I shall of course set out the material provisions in the Regulations. However this is not a case where it is said that any further right is conferred by the Regulations than is given by the Directive; nor that the text of the Regulations fails properly to transpose the Directive into UK law. The question with which we are in the end concerned is whether rolled-up holiday pay arrangements such as those arrived at on the facts of these appeals are compatible with the European measure. Accordingly I think it most convenient first to set out the relevant provisions of the Directive.
16. As is shown by the first recital, the vires of the Directive is Article 118a of the EC Treaty. It is worth setting out these extracts from Article 118a:

"(1) Member states shall pay particular attention to encouraging improvements, especially in the working environment, as regards the health and safety of workers, and shall set as their objective the harmonisation of conditions in this area…

(2) In order to help achieve the objective laid down in the first paragraph, the Council… shall adopt by means of Directives, minimum requirements for gradual implementation, having regard to the conditions and technical rules obtaining in each of the member states. Such Directives shall avoid imposing administrative, financial and legal constraints in a way which would hold back the creation and development of small and medium-sized undertakings.

…"

17. Turning to the Directive itself, it is necessary to set out only three of the recitals (which I have numbered for convenience):

"5. Whereas the improvement of workers' safety, hygiene and health at work is an objective which should not be subordinated to purely economic considerations;

…

8. Whereas, in order to ensure the safety and health of Community workers, the latter must be granted minimum daily, weekly and annual periods of rest and adequate breaks…;

…

17. Whereas, in view of the question likely to be raised by the organization of working time within an undertaking, it appears desirable to provide for flexibility in the application of certain provisions of this Directive, whilst ensuring compliance with the principles of protecting the safety and health of workers[.]"

18. The material parts of the executive provisions of the Directive are as follows:

"Article 1

Purpose and Scope

1. This Directive lays down minimum safety and health requirements for the organization of working time.

2. This Directive applies to:

(a) minimum periods of daily rest, weekly rest and annual leave, to breaks and maximum weekly working time;…

Article 2

Definitions

For the purposes of this Directive, the following definitions shall apply:

1. Working time shall mean any period during which the worker is working, at the employer's disposal and carrying out his activity or duties, in accordance with national laws and/or practice;…

Article 7

Annual leave

1. Member States shall take the measures necessary to ensure that every worker is entitled to paid annual leave of at least four weeks in accordance with the conditions for entitlement to, and granting of, such leave laid down by national legislation and/or practice.

2. The minimum period of paid annual leave may not be replaced by an allowance in lieu, except where the employment relationship is terminated."

Article 17 sets out a long list of derogations which Member States are entitled to make from their obligations pursuant to various provisions of the Directive. There is no power to derogate from Article 7.

THE REGULATIONS

19. Now I may turn to the Regulations. Their only vires stated in the preamble is s.2(2) of the European Communities Act 1972; it is plain that there was no intention in the subordinate legislator to make any provision beyond the implementation of the Directive. Here are the relevant measures:

"2 Interpretation

(1) In these Regulations –

…

'relevant agreement', in relation to a worker, means a workforce agreement which applies to him, any provision of a collective agreement which forms part of a contract between him and his employer, or any other agreement in writing which is legally enforceable as between the worker and his employer;

…

'working time', in relation to a worker, means –

(a) any period during which he is working, at his employer's disposal and carrying out his activity or duties,

…

13 Entitlement to annual leave

(1) … [A] worker is entitled to four weeks' annual leave in each leave year.

…

(9) Leave to which a worker is entitled under this regulation may be taken in instalments, but –

(a) it may only be taken in the leave year in which it is due, and

(b) it may not be replaced by a payment in lieu except where the worker's employment is terminated.

…

15 Dates on which leave is taken

(1) A worker may take leave to which he is entitled under regulation 13 on such days as he may elect by giving notice to his employer in accordance with paragraph (3), subject to any requirement imposed on him by his employer under paragraph (2).

(2) A worker's employer may require the worker –

(a) to take leave to which he is entitled under regulation 13; or

(b) not to take such leave,

on particular days, by giving notice to the worker in accordance with paragraph (3).

(3) A notice under paragraph (1) or (2) –

(a) may relate to all or part of the leave to which a worker is entitled in a leave year;

(b) shall specify the days on which leave is or (as the case may be) is not to be taken and, where the leave on a particular day is to be in respect of only part of the day, its duration;

…

(5) Any right or obligation under paragraphs (1) to (4) may be varied or excluded by a relevant agreement.

…

16 Payment in respect of periods of leave

(1) A worker is entitled to be paid in respect of any period of annual leave to which he is entitled under regulation 13, at the rate of a week's pay in respect of each week of leave.

…

(4) A right to payment under paragraph (1) does not affect any right of a worker to remuneration under his contract ('contractual remuneration').

(5) Any contractual remuneration paid to a worker in respect of a period of leave goes towards discharging any liability of the employer to make payments under this regulation in respect of that period; and, conversely, any payment of remuneration under this regulation in respect of a period goes towards discharging any liability of the employer to pay contractual remuneration in respect of that period.

…

35 Restrictions on contracting out

(1) Any provision in an agreement (whether a contract of employment or not) is void in so far as it purports –

i) (a) to exclude or limit the operation of any provision of these Regulations, save in so far as these Regulations provide for an agreement to have that effect…"

THE PROCEEDINGS BELOW

20. I mean no disrespect if I deal with the decisions of the ET quite shortly. In Caulfield the ET held that the contractual arrangements entered into between Marshalls Clay and the appellants relating to holiday pay were unlawful as being in violation of the Regulations.^[1] They stated (paragraph 10):

"In our view this scheme of rolled up holiday pay contravenes the provisions of Regulation 13(9)(b) of the… Regulations… It permits payment in lieu of holiday, and, when any particular worker is financially pressed, encourages it."

21. In Clarke the ET had held that the analogous arrangements of which complaint was made were not unlawful. They stated (paragraph 13):

"[The applicant]… accepted the term… to the effect that his daily pay rate included an element of holiday pay. There was therefore no breach of the provisions of the… Regulations."

22. The EAT heard argument in Caulfield on 10 June 2003. They reserved judgment because four further cases involving the legality of rolled-up holiday pay arrangements were listed before them on 25 June. One of those was Clarke. It is unnecessary to say anything about the others. Judgment was delivered in all of the appeals on 24 July 2003. The EAT (paragraph 14) adopted a categorisation of employment contracts, relevant to the issue of the legality of provisions on holiday pay, which had been put forward by Mr Hogarth:

i) Contracts between the worker and the employer which are silent in relation to holiday pay.

ii) Contracts which purport to exclude any liability for or entitlement to holiday pay.

iii) Contracts where the rates are said to include holiday pay, but there is no indication or specification of an amount.

iv) Contracts providing for a basic wage or rate topped up by a specific sum or percentage in respect of holiday pay.

v) Contracts where holiday pay is allocated to and paid during (or immediately prior to or immediately after) specific periods of holiday.

23. As I have said, the argument in both tribunals below proceeded by reference to the terms of the Regulations rather than the Directive. The EAT's conclusions were as follows:

"37. (i) Mr Hogarth QC's Categories 1, 2 and 3 fall foul of the Regulations, howsoever construed. In our judgment, in such situations either there is no 'contractual remuneration paid to a worker in respect of a period of leave' to be set off against the statutory entitlement under Regulation 16(1), and there is a simple breach of Regulation 16(1) and/or an entitlement to be paid pursuant thereto: or there is a purported exclusion of such entitlement, which is void pursuant to Regulation 35(1)(a). Our conclusion is however that, in principle, a Category 4 contract, providing for payment of holiday pay, in respect of an express holiday entitlement, but accruing throughout the year, is indeed an entitlement to 'contractual remuneration… in respect of a period of leave' albeit that it is not, and in the case of [Caulfield] cannot, at the stage of its payment be specifically appropriated to any particular period, and is not paid at the time of such leave, but wholly or in part in advance of it. However we are satisfied that there must be contractually a specific sum, or percentage, allocated to holiday pay:

a) in order to ensure that there is payment under Regulation 16(1), and/or to prove that there has been payment under Regulation 16(5).

b) so as to ensure that a specific sum on an accruing basis will have been paid during the year so as to satisfy any entitlement to accrued holiday pay on termination, pursuant to Regulation 14…"

The EAT proceeded to hold that the contracts in Caulfield were not offensive to the Regulations, so that Marshalls Clay's appeal was allowed. They stated in terms (paragraph 38) that Regulation 16 did not require the employer "to allocate holiday pay to a specific period or to pay it at the time when (or immediately before or after) such holiday is taken". The reason why the EAT in Clarke referred the matter back for clarification of the issues I have mentioned (paragraph 13) was to see whether there was in truth a Category 4 contract in that case, for part or the whole of the period when the appellant worked for Frank Staddon.

THE APPELLANTS' NEW ARGUMENT IN CAULFIELD

24. It is convenient first to deal with Mr Hogarth's submission, advanced as I understand it for the first time on this appeal, that the contractual arrangements in Caulfield expose a florid violation of the Directive and the Regulations because they do not allow for annual leave at all. The submission depends on the proposition that a worker who in any year takes advantage of the contract's provision for an extended period of leave of 8 or 16 days does just as much work, not a day less, than his fellow who takes no such leave but merely sticks, all through the year, to the four days on/four days off regime. The argument's premise, of course, is that the worker remaining on the ordinary regime gets no leave. The premise is false. I have already set out the material terms of the collective agreement, including this provision: "[h]olidays are taken during the rest day periods in the rota system". It is beyond contest that rest day periods are included in the four days on/four days off regime. There can in my judgment be no quarrel with the EAT's finding at paragraph 17 (which I have already set out):

"… [H]olidays are taken by the employees as part of their four out of every eight days throughout the year… approximately one quarter of 363 [days] are available as holidays or as (non-weekend) rest days."

See also the document of 29 May 1984 which I have quoted at paragraph 6 and will not set out again.

25. The argument is lent a superficial attractiveness by Mr Hogarth's specific submission, advanced at paragraph 5(1) of his supplementary skeleton and orally before us, "that a day can only be described as a day of leave if it is a day on which the worker would otherwise be working". He submits that this condition (as he would categorise it) is not fulfilled in the arrangements in the Caulfield contracts. He would claim support from the definitions of "working time" in the Directive and the Regulations. But the submission proves too much and therefore goes nowhere. Save in a case where the contract dictates the dates on which leave is to be taken (and of course no one contends that the Directive requires so crudely inflexible a state of affairs), any day might be one on which "the worker would otherwise be working".
26. There is nothing in this new argument. Nor can it run as a vehicle for what would be a different submission, that there was here an illegitimate payment in lieu, in breach of Article 7(2) of the Directive, or regulation 13(9)(b) of the Regulations. There is in my judgment no viable argument to that effect in either of these appeals.

THE REAL ISSUE IDENTIFIED

27. I would express the real issue in my own words as follows. If holiday pay is, as in these cases, "rolled up" into or within the worker's ordinary pay packet, is his entitlement to paid annual leave in practice undermined, indeed negated, so that such arrangements involve a violation of the affected workers' right guaranteed by Article 7 of the Directive? In essence it is said that holiday pay must be allocated to a specific period or (and I think it really comes to the same thing) must be paid at the time when, or immediately before or after, the holiday is taken.

MPB STRUCTURES Ltd v MUNRO [2003] IRLR 350

28. Munro is the decision of the First Division of the Inner House of the Court of Session to which I referred above at paragraph 2, and I must come shortly to Mr Hogarth's argument, there foreshadowed, as to the effect of the law of precedent. I introduce the case now because the reasoning of the President, Lord Cullen (giving the judgment of the court), is with great respect the best support to be found for Mr Hogarth's submission on what I have called the real argument in the case.
29. The case went to the Court of Session on appeal from the EAT. Mr Munro's contract of employment provided for an hourly rate of £10 within which there was a specified allowance of 8% for holiday pay. I need not trouble further with the facts. Lord Cullen's reasoning appears at paragraphs 13 ff:

"13. Since it is not in dispute that the Regulations fall to be interpreted in the light of the purposes of the Directive, it is to the Directive that we turn first. Among the matters which it recites is that 'in order to ensure the safety and health of Community workers, the latter must be granted minimum daily, weekly and annual periods of rest and adequate breaks; whereas it is also necessary in this context to place a maximum limit on weekly working hours'. [Article 7 of the Directive is then set out.]

Thus it is clear that the Directive treats the right to annual leave and to payment for it as part of a single entitlement. This is not directly reproduced in the Regulations since entitlement to annual leave is created by reg. 13, whereas the entitlement to payment is created by reg. 16. The wording of the Directive strongly suggests, in our view, a close association between the two. The submission made by [counsel] on behalf of the respondent was that workers had the right to be paid for annual leave at the time it was taken. He emphasised, in our opinion correctly, that this was supported by the intention of the Directive to ensure the safety and health of workers. In the end of the day the question, in our view, comes to be whether reg. 16(1) bears this implication, and in particular by providing for a worker's entitlement to be paid 'in respect of any period of annual leave'.

14. There is no doubt that the injunctions contained in Article 7 in regard to paid annual leave are of fundamental importance. That Article is excepted from the scope of the power of Member States to derogate in terms of Article 17. Within the scope of Article 7 there is, as was observed in the BECTU decision^[2], scope for member states to regulate certain matters. However, we are of the opinion that it is 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.

15. There is no suggestion that the appellant adopted the arrangement of 'rolling up' the holiday pay in an attempt to avoid the requirements of the Regulations. However, this arrangement was, we consider, not in accordance with the requirements of the Regulations, and would tend to lead to situations in which workers were discouraged from taking their holidays when they would otherwise have sought to do so, and hence it would have conflicted with what the Regulations and the Directive sought to achieve."

THE ARGUMENT AS TO PRECEDENT

30. As I have indicated Mr Hogarth submitted that the EAT in these cases ought to have followed Munro. I understood him to mean that as a matter of law, not discretion or good sense, it should have done so. If it is right this implies that this court would also be bound by the Court of Session, at least to the extent that we should be obliged to correct the EAT's failure to follow the Inner House; and that would give effect within this jurisdiction to the Munro judgment.
31. I am afraid I regard this argument as nothing but a distraction from the real questions posed by this appeal. However, I acknowledge these following propositions at once. (1) The ET, EAT, and the Court of Session on appeal from the EAT administer in Scotland (with some esoteric qualifications not relevant for present purposes) the same statutory regimes as do the ET, EAT, and the Court of Appeal on appeal from the EAT in England. (2) Indeed the EAT spans the jurisdictions of England Wales and Scotland as a single jurisdiction: s.20 of the Employment Rights Act 1996 provides that it is to be a superior court of record and is to have a central office in London, but may sit in any place in Great Britain. (3) As a matter of pragmatic good sense the ET and the EAT in either jurisdiction will ordinarily expect to follow decisions of the higher appeal court in the other jurisdiction (whether the Court of Session or the Court of Appeal) where the point confronting them is indistinguishable from what was there decided.
32. In my judgment, however, none of this brings Mr Hogarth's argument home. The rules of precedent or stare decisis cognisable here are given by the common law. Part of their substance, though not its whole, is that decisions of the Court of Appeal bind the Court of Appeal itself and all lower courts. They include refinements which teach where the edge of precedent is to be found, so that often the earlier decision can be distinguished. I need not go into those. The essence is that precedent confines the very power of the courts subject to it. It is not a rule of discretion or comity or anything of the kind. It is therefore of necessity a doctrine whose reach is limited to the jurisdiction in which the courts in question operate. The House of Lords is no exception; by statute its writ runs to three jurisdictions, and accordingly it binds the lower courts within each of those jurisdictions. Statute might also extend the scope of precedent, as was done by the European Communities Act 1972, part of whose effect is to give binding force over the national courts to decisions of the European Court of Justice (in matters within the latter's proper competence). Had the Human Rights Act 1998 provided that the courts of the United Kingdom should be bound by decisions of the European Court of Human Rights, rather than take account of them, that would have been another instance. Now, statutory provisions which give dominion to courts in one jurisdiction (international or otherwise) over courts in another are apt, here at least, to father constitutional tensions. But it is at least clear, and here is the point on this part of the case, that it would be a constitutional solecism of some magnitude to suggest that by force of the common law of precedent any court of England and Wales is in the strict sense bound by decisions of any court whose jurisdiction runs in Scotland only or – most assuredly – vice versa. Comity and practicality are another thing altogether. They exert a wholly legitimate pressure.
33. Mr Hogarth's argument on this part of the case is thus in my judgment mistaken. The EAT here was not obliged by law to follow the Court of Session. And this court certainly is not.

THE REAL ARGUMENT CONFRONTED

34. I shall of course come back to the reasoning in Munro. First, however, I should refer to some other learning drawn to our attention at the hearing. Gridquest Ltd [2002] ICR 1206 was, like these cases, a decision of this court on appeal from the EAT. The employers claimed that the workers' hourly rate of pay included an element attributable to holiday pay. But that had not been specified, nor agreed to by the workers. In those circumstances this court held that the right to paid holiday was not fulfilled. Delivering the first judgment (with which their other Lordships agreed) Pill LJ said this:

"7. … Only if it is agreed between employer and employee that the weekly payment includes an amount for something else, such as holiday pay, can it be held to do so. An employer cannot unilaterally decide that the week's pay is a payment not only for the hours worked during the week but includes an element of holiday pay. The claim that holiday pay was 'in fact' paid amounts to an assertion that the employer can decide unilaterally what is included in the weekly payment.

8. … If the worker has not agreed that the sum paid includes a sum in respect of a period of leave, it is no part of the contract that the sum includes an element of holiday pay…"

35. Were the point live before us in these appeals, we should of course be bound by this reasoning; but in any event I should wish respectfully to emphasise my emphatic agreement with it. As it happens, in these present cases the facts of Caulfield unquestionably show that there was specific agreement as to the allocation of a percentage of the agreed rate of pay to holiday pay. The same is true in Clarke, subject (if the EAT's order stands) to the ET's further examination of the question whether there had before August 2001 been any attribution to holiday pay of a percentage or proportion of the daily rate. We are not, therefore, directly concerned with the Gridquest issue. I should notice that the court in that case was invited to decide, in the workers' favour, the very question now before us as to whether arrangements for rolled-up holiday pay defeat the object of the Directive; and reference was made to the EAT decision in Munro (the case had not by then reached the Court of Session). However Pill LJ held (paragraph 15) that given there was in fact no agreement for a rolled-up rate in Gridquest, it was neither necessary nor appropriate to pass judgment on this further question.
36. The only other case to which I need refer aside from Munro is the decision of the European Court of Justice in R (Broadcasting, Entertainment, Cinematographic and Theatre Union) v Secretary of State [2001] ICR 1152, to which I will refer as BECTU. As I have shown Lord Cullen referred to this authority in Munro. Again, the point at issue in BECTU was very different from the question in these appeals. The proceedings were constituted by a reference under Article 234 of the Treaty from the High Court here, where a challenge had been brought to the legality of what was then regulation 13(7) of the Regulations which provided that the right to paid annual leave did not arise until a worker had been continuously employed for 13 weeks. The Court of Justice duly held that this rule was not permitted by Article 7 of the Directive, not being justified by the reference in Article 7 to "conditions… laid down by national legislation and/or practice". Mr Hogarth drew attention to the Advocate General's emphasis (paragraph 25 of his Opinion) of the fact that in various international instruments of high authority "the right to a period of paid leave is unequivocally included among workers' fundamental rights." And at paragraph 51 the Advocate General refers to Recital (5) to the Directive, which I have set out.
37. The Court of Justice in BECTU, as I read the judgment, did not disagree with the Advocate General's reasoning. They drew an important distinction, which to my mind sounds in the present case. It is between the prescription of conditions under which the right to paid annual leave is to be enjoyed, and the erection of obstacles which actually bar the right's enjoyment. The former is permitted to the Member States; the latter (plainly enough) is not. I have expressed the distinction thus in my own words, which I intend as a fair reflection of the court's judgment in these following paragraphs:

"52. … [The] Directive… must be interpreted as precluding member states from unilaterally limiting the entitlement to paid annual leave conferred on all workers by applying a precondition for such entitlement which has the effect of preventing certain workers from benefiting from it.

53. The expression 'in accordance with the conditions for entitlement to, and granting of, such leave laid down by national legislation and/or practice' must therefore be construed as referring only to the arrangements for paid annual leave adopted in the various member states… [A]lthough they are free to lay down, in their domestic legislation, conditions for the exercise and implementation of the right to paid annual leave, by prescribing the specific circumstances in which workers may exercise that right, which is theirs in respect of all the periods of work completed, member states are not entitled to make the existence of that right, which derives directly from [the] Directive…, subject to any preconditions whatsoever.

…

55. … [I]t must be borne in mind that [the] Directive… merely lays down minimum requirements for harmonisation of the organisation of working time at Community level and leaves member states to adopt the requisite arrangements for implementation and application of those requirements. Those measures may therefore display certain divergences as regards the conditions for exercising the right to paid annual leave but, as the court has held in paragraphs 52 and 53 of this judgment, [the] Directive does not allow member states to exclude the very existence of a right expressly granted to all workers."

I would notice also paragraph 61 of the judgment in BECTU:

"61. Furthermore, the Directive does not prevent the member states from organising the way in which the right to be paid annual leave may be exercised by regulating, for example, the manner in which workers may take the annual leave to which they are entitled during the early weeks of their employment."

38. BECTU was dealing with a provision of domestic law which excluded the right to paid annual leave altogether for a certain class of workers, and with respect it is little surprise that the Court of Justice condemned the measure as unlawful. But given my rejection (paragraphs 24 – 26 above) of Mr Hogarth's submission that the contractual arrangements (at least in Caulfield) do not allow for annual leave at all, we are not on these appeals faced with anything approaching such a state of affairs. Nor was it suggested in Munro that a contract for rolled-up holiday pay constituted an exclusion of the "very existence" of the right to paid annual leave. The premise of the Munro decision, then, and of the argument in these appeals also, must be that even though it does not actually exclude enjoyment of the right, a contractual measure may place such obstacles in the way of its enjoyment as to be tantamount to its exclusion.
39. I would certainly accept that there could be provisions in a contract of employment which so gravely obstructed the enjoyment of the right to paid leave that the court would be bound to hold that the right was denied as surely as if it had been abrogated in terms. That is merely the consequence of the court's elementary duty to look at the practical effect of any measure which is said to violate the right.
40. I would, however, incline to go further. I conceive that contractual provisions might be entered into which were not so obstructive that the court would distinctly hold that they denied the right in any absolute sense, but which nevertheless made its enjoyment sufficiently difficult or problematic that they would fall to be treated as repugnant to Article 7. There is surely an implicit but critical distinction between the creation of a framework, or the imposition of conditions, under which the right may reasonably be enjoyed, and the establishment of barriers or obstructions which prevent, or at least substantially inhibit, its reasonable enjoyment. The former are entirely legitimate. Appropriate contractual frameworks and conditions may vary from Member State to Member State. Their legitimacy is underpinned by, at least, the spirit of the principle of subsidiarity. More concretely, it is in my judgment made clear by paragraphs 53 and 55 of the judgment of the Court of Justice in BECTU, which I have set out. It is also I think confirmed by materials such as these following, which, again, I have already cited: (a) Article 118a(2) of the Treaty: "Such Directives shall avoid imposing administrative, financial and legal constraints in a way which would hold back the creation and development of small and medium-sized undertakings"; (b) these words in the seventeenth recital: "… it appears desirable to provide for flexibility in the application of certain provisions of this Directive, whilst ensuring compliance with the principles of protecting the safety and health of workers"; and (c) this part of the provision made by Article 7 itself: "annual leave… in accordance with the conditions for entitlement to, and granting of, such leave laid down by national legislation and/or practice".
41. Which side of the line any given set of facts falls may well be a matter of degree. Reasonable conditions and unreasonable or unacceptable obstructions are, neither of them, sharp-edged or precise ideas. What is the position in relation to rolled-up holiday pay? It is time to return to Munro.
42. I consider, with great respect, that these propositions can be distilled from the Lord President's reasoning in the passage I have quoted:

i) The right to annual leave and to payment for it are part of a single entitlement; there is a close association between the two.

ii) The payment must be made "in association with the taking of the leave". This, I think, is another formulation of counsel's submission (which I understand to be accepted at paragraph 13) that "workers had the right to be paid for annual leave at the time when it was taken".

iii) The arrangements for rolled-up holiday pay in Munro, and indeed by implication any such arrangements, did not satisfy (ii). The reason is that they "would tend to lead to situations in which workers were discouraged from taking their holidays when they would otherwise have sought to do so".

43. I have to confess that I entertain considerable difficulty in relation to this reasoning, most particularly with propositions (ii) and (iii). First, I cannot see that Article 7 imposes by its language an obligation to pay the worker in respect of his leave at the time the leave is taken. The right is to "paid annual leave". That would I think be satisfied in a case where the worker is paid monthly in arrears or in advance, or even six-monthly or yearly in arrears or in advance, irrespective of the time when his leave is taken and whether or not at the time of payment (if made in advance) it is known when it would be taken. The requirement of Article 7 is surely twofold: (a) the worker is entitled to annual leave of at least four weeks; (b) he is to be paid as well for the period when he takes leave as for the period when he works. Article 7 says nothing about the timing of payment for the leave period or periods.
44. If that is right, the position cannot be different under any provision contained in the Regulations, such as regulation 16(1). In fairness, I do not think any difference is suggested; but it is important to be clear that since the only authority for the making of the Regulations is s.2(2) of the European Communities Act 1972, if on their true construction they apparently imposed any tighter requirement than that given by the Directive, they would to that extent be ultra vires. They must be construed if possible so as to avoid that result. There is no difficulty in so construing them.
45. If, then, the Lord President's reasoning cannot be supported by reference to the language of the Directive (or Regulations), it must in my judgment depend on an implicit conclusion that a contract for rolled-up holiday pay falls on the wrong side of the line given by the distinction I have drawn between legitimate conditions and illegitimate obstructions. Whether or not it does so must surely in its turn depend on the force of the Lord President's view expressed at paragraph 15 that such contractual arrangements "would tend to lead to situations in which workers were discouraged from taking their holidays when they would otherwise have sought to do so". Nothing else is suggested as showing that rolled-up holiday pay is on the wrong side of the line.
46. I have to confess, with very great deference, that I find myself in profound disagreement with the view of the Inner House on this issue. First, it is by no means clear that a provision which discourages workers "from taking their holidays when they would otherwise have sought to do so" is repugnant, or even antipathetic, to the effectiveness of Article 7 of the Directive. Such a provision is a far cry from one which would discourage the workers from taking their holidays at all.
47. Secondly however, and more deeply, I cannot think that it is right to suppose or conclude that workforces up and down the land are not really up to planning their holiday arrangements to their liking against a background of pay arrangements such as those made in these cases. Yet something of the kind is I think suggested in Munro: the "discouragement" referred to must surely amount to a substantial obstruction of the right's enjoyment if the arrangements in question are to be held repugnant to Article 7. As Miss Eady submitted, however, it will suit some to have their holiday money "up front"; others less so. As it seems to me there is no reason why workers generally should not manage rolled-up holiday pay perfectly sensibly.
48. On this part of the case I think it important to recognise that the appetite of workers to manage their own affairs with little intrusive regulation must surely vary across the Union, and indeed vary from workforce to workforce within any Member State. Some will give greater value to flexible arrangements, others to a regime where they have fewer decisions about money to make for themselves. I would venture to suggest, with great respect, that the approach of the Inner House gives the latter position a primacy of place that cannot be justified as an overall reality, whether viewed across the complex societies of the Member States in general or by reference to the United Kingdom in particular.
49. In addition, it is I think extremely germane to notice (where it is the case, as in Caulfield) that the rolled-up holiday pay arrangements in question are the fruit of full and proper negotiations between the employers and the relevant trade union or unions, leading to a collective agreement. I have shown that by paragraph 2(1) of the Regulations "relevant agreement" includes provisions in a collective agreement, and there are references to "collective agreement" in the Directive which I need not set out. In deciding to what side of the line between legitimate conditions and illegitimate obstructions any particular set of arrangements belongs, the fact that the arrangements are the product of a collective agreement must point strongly towards their legitimacy. By definition the provision of paid leave will in principle have been allowed for; otherwise the arrangements fall at the first hurdle and no question about which side of the line they go can arise. But where that question does arise, the makers of the collective agreement, thus including of course the trade union which will be astute to protect its members' proper interests, will generally be its best judge. Not its only judge, of course; its last judge must be the court, where a challenge is mounted. But a failure to accord great weight to the collective agreement would, in the absence of special circumstances, betray a bureaucratic centralism wholly unjustified by the legislation.
50. For all these reasons, the contracts in these cases (subject to the order for remission in Clarke) did not in my judgment fall foul of the Directive or the Regulations.

WHAT ORDER SHOULD THIS COURT MAKE?

51. If my Lords agree with my reasoning and conclusions, there will be contradictory decisions of the Court of Appeal and the Court of Session upon the same point relating to the application of the Directive. That is plainly an unsatisfactory state of affairs. If all else were equal it would, I think, require us to make a reference to the Court of Justice under Article 234 of the Treaty so as to have the matter resolved, notwithstanding the strong terms in which (as I acknowledge) I have expressed myself: in light of the Court of Session's opposite view it would be a hard thing indeed to hold that the point is acte clair.
52. However the question of a reference has in a sense been overtaken by events. Since the hearing before us on 27 January 2004 counsel has written to the court, very properly, to indicate that on 3 March 2004 an Employment Tribunal sitting at Leeds, dealing with another case in which it was said that provision for rolled-up holiday pay failed to satisfy the worker's Article 7 right, itself referred these two questions to the Court of Justice:

"1. Is Article 7 of Council Directive 93/104/EC consistent with provisions of national law which allow pay for annual leave to be included in a worker's hourly remuneration and paid as part of remuneration for working time but not paid in respect of a period of leave actually taken by the worker?

2. Does Article 7.2 preclude the national tribunal from giving credit to an employer for such payments when it seeks to give to the applicant en effective remedy according to powers contained in national regulations?"

Counsel's letter of 21 March 2004, enclosing the order for the reference, understandably expresses some surprise at the fact that the order was made before the period of 42 days fixed for filing an appeal had elapsed notwithstanding the terms of paragraph 22 of Schedule 1 to the Employment Tribunal (Constitution etc) Regulations 2001, which apparently provides that such a reference should not be made until after the time for filing an appeal has passed. However there is no suggestion that the reference is in some way incompetent, and counsel's letter confirms that it has been received by the Court of Justice.

53. I would with respect have phrased Question 1 quite differently. The ET's wording asks whether there is an inconsistency between Article 7 and "provisions of national law" which allow leave pay to be included in the worker's ordinary remuneration. That seems to me to be confusing. The provision for rolled-up holiday pay (which must be what is referred to) is a function of particular contracts, which of course may or may not be constituted by collective agreements. It is not in any other sense a function of "national law". In addition, the question by its closing words assumes (indeed it states) that rolled-up holiday pay, or at least the version of it arising on the facts in that case, violates the worker's entitlement under regulation 16(1) of the Regulations "to be paid in respect of any period of annual leave to which he is entitled under regulation 13". I do not accept that that is so. In any event the only true issue is as to the compatibility of rolled-up holiday arrangements with the Directive. The Regulations, given the limited and specific nature of their vires, cannot add or subtract any requirements outside what the Directive contains. If they purported to add, they would be ultra vires. If they purported to subtract, they would have failed to implement the Directive. Neither proposition was advanced before us nor, so far as I can see, before the Leeds ET.
54. Again if my Lords agree, there are two possible courses of action open to us. The first is simply to dismiss these appeals and do no more, in the knowledge that the substantive issue as to the legality of rolled-up holiday arrangements is in any event going to Luxembourg via the Leeds Tribunal reference. The second is to make a further reference ourselves. In either event some time will pass in which I suppose the EAT deciding Scottish cases will follow Munro and the EAT deciding English cases will follow the judgments in these appeals. That period for obvious reasons of certainty and finality must be kept as short as possible. The imperative, therefore, is to secure maximum expedition in the Court of Justice where, I fear, the pressure of work is all too well known. I incline to think that the better course is to refer ourselves. I have three considerations in mind. First, we may formulate questions for the court (with counsel's assistance) to our own satisfaction. Secondly, our reference may and should expressly seek expedition. Thirdly we may (and again should) seek or suggest an order which would conjoin our reference with that made by the Leeds Tribunal. However I would wish to hear short submissions as to which course should be preferred. It must go without saying that if in the event we do not ourselves refer, the Court of Justice must nonetheless be provided with our judgments in these appeals for its consideration of the Leeds reference.

Mr Justice Charles:

55. I agree.

Lord Justice Judge:

56. I also agree.

Note 1   There was a point on the facts about the case of the fourth applicant before the ET: see paragraph 12 of the determination. It is unnecessary to go into it.    [Back]

Note 2   [2001] ICR 1152. I discuss this case below.    [Back]