United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant: 1. Marshalls Clay Products Ltd 2, P S Pearce: 3. Clarke: 4. Sutton: 5. Hoy: For the Respondent: 1. Caulfield and Others: 2. P S Pearce: 3. Clarke: 4. Sutton: 5. Hoy:

1. Miss Jennifer Eady instructed by Messrs Pinsent Curtis Biddle, 1 Park Row, Leeds, LS1 5AB 2-5: Mr A Hogarth QC instructed by Messrs O H Parsons & Partners, Sovereign House, 212-224 Shaftesbury Avenue WC2H 8PR 1. Mr Bruce Carr instructed by Messrs Whittles, 23 Princess Street, Manchester, M2 4ER 2. Not present nor represented. 3. Mr J Gallagher (Director) 4. Mr T Weal (Director) 5. Not present nor represented


 


THE HONOURABLE MR JUSTICE BURTON (PRESIDENT):

1. This is an appeal relating to the lawfulness within the Working Time Regulations 1998 ("the Regulations") of agreements between employers and workers (as defined in the Regulations) relating to holiday pay. Six appeals have been before us. In the first, Marshalls Clay Products Ltd v Caulfield and Others ("Marshalls Clay") it was common ground that there was an agreement whereby in respect of the rate paid for every hour worked (including overtime) there was included an identified sum by way of holiday pay, which was thus paid throughout the year ("rolled-up holiday pay"). In that appeal, which was brought by Marshalls Clay against a decision of the Employment Tribunal in Manchester, which had concluded such rolled-up holiday pay provision to be unlawful, the employer, Marshalls Clay, was represented by Jennifer Eady of Counsel, and the Applicants, Respondents to the appeal, by Bruce Carr of Counsel, and the appeal was heard before us on 10 June. The second appeal, McCarthy and Others v Blue Sword Construction Ltd ("Blue Sword") was also before us on that day, but the issue had in fact been rendered academic by the decision of HH Judge Reid QC in a separate hearing in that case earlier that day, that there was no relevant rolled-up holiday pay provision agreed, so that although Mr Brian Gallagher of Counsel on behalf of the Applicants and Mr Camp, a representative of the Respondent appeared before us, the issue no longer remained live. We nevertheless found the facts and submissions in that case, particularly those from the Respondent, very helpful. We reserved judgment in Marshalls Clay on 10 June, because we knew that there were to be four more cases before us on 25 June 2003.
2. In those cases, namely P S Pearce v Huw Howatson Ltd ("Pearce"), Clarke v Frank Staddon Ltd ("Clarke"), Sutton v Potting Construction Ltd ("Sutton") and Hoy v Hanlin Construction ("Hoy"), Andrew Hogarth QC appeared in all four on behalf of the Applicants as Appellants, while Mr J Gallagher and Mr T Weal, Directors of the respective Respondent companies, appeared in Clarke and Sutton, and the Respondents in Pearce and Hoy were neither present nor represented, knowing that their case was in any event to be fully put before the Court on their behalf. In these four cases, as will appear, the issues relating to holiday pay differed. We heard submissions in all of them on 25 June: Miss Eady again attended on behalf of Marshalls Clay, although in the event only for the purpose of clarifying one or two factual matters, and Mr Carr's interests were so far as necessary represented by Mr Hogarth QC. At the end of 25 June, we indicated our decision, but that the reasons would be reserved, and these are those reasons.

The Directives and the Regulations

3. The Regulations were and amounted to the performance of the United Kingdom's obligations as a result of the Working Time Directive (Council Directive 93/104/EC). This Directive begins with a number of recitals, as is normal, which illustrate or indicate the purpose of the Directive. We have numbered those recitals (of which there are in fact seventeen) and the material ones are as follows:

"1. Whereas Article 118a of the Treaty provides that the Council shall adopt, by means of directives, minimum requirements for encouraging improvements, especially in the working environment, to ensure a better level of protection of the safety and health of workers;

2. Whereas, under the terms of that Article, those directives are to avoid imposing administrative, financial and legal constraints in a way which would hold back the creation and development of small and medium-sized undertakings;

4. Whereas the Community Charter of the Fundamental Social Rights of Workers … declared that …

[8] Every worker in the European Community shall have a right to a weekly rest period and to annual paid leave, the duration of which must be progressively harmonised in accordance with national practices.

5. Whereas the improvement of workers' safety, hygiene and health at work is an objective which should not be subordinate 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 organisation 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."

4. Article 7 of the Directive is the material one:

"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."

5. The context in which the Regulations were implemented pursuant to the United Kingdom's obligations under the Directive were explained in R (Broadcasting, Entertainment, Cinematographic and Theatre Union) v Secretary of State for Trade and Industry ("BECTU") [2001] ICR 1152, a decision of the European Court of Justice. The Advocate General pointed out at paragraph 25 that "the right to a period of paid leave is unequivocally included workers' fundamental rights", but he continued at paragraph 34 (substantially approved by the Court at paragraph 53 of its judgment):

"It is not of course my intention to deny that … reference must be made to national legislation and therefore that the Member States enjoy some latitude in defining the arrangements for enjoyment of the right to leave. In particular, as the Commission also points out, the reference is intended to allow the Member States to provide a legislative framework governing the organisational and procedural aspects of the taking of leave, such as planning holiday periods, the possibility that a worker may have to give advance notice to the employer of the period in which he intends to take leave, the requirement of a minimum period of employment before leave can be taken, the criteria for proportional calculation of annual leave entitlement where the employment relationship is of less than one year, and so forth. But these are precisely measures intended to determine the "conditions for entitlement to, and granting of" leave and as such are allowed by the Directive. What, on the other hand, does not seem to be allowed by the Directive is for national legislation and/or practice to operate with absolutely (or almost) no restrictions and to go so far as to prevent that right from even arising in certain cases."

6. The Regulations provide in material part:

"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 respect of which it is due, and

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

7. Regulation 14 relates to entitlement where:

"(a) a worker's employment is terminated during the course of his leave year, and

(b) on the date on which the termination takes effect ("the termination date") the proportion he has taken of the leave to which he is entitled in the leave year under regulation 13 differs from the proportion of the leave year which has expired."

8. By Regulation 15:

"(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)."

9. The balance of Regulation 15 relates to such requirements and provisions, and there is a special Regulation 15A, inserted in 2001, relating to leave during the first year of employment. By Regulation 16, the following is provided:

"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 [i.e. 4 weeks' annual leave in each leave year] at the rate of a week's pay in respect of each week of leave.

(4) A right to payment under (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."

10. Two miscellaneous provisions remain to be recited:

"30. Remedies

(1) A worker may present a complaint to an employment tribunal that his employer -

(a) has refused to permit him to exercise any right he has under … regulation 13 …

(b) has failed to pay him the whole or any part of any amount due to him under regulation … 16(1).

(3) Where an employment tribunal finds a complaint under paragraph 1(a) well-founded the tribunal –

(a) shall make a declaration to that effect, and

(b) may make an award of compensation to be paid by the employer to the worker.

(4) The amount of the compensation shall be such as the tribunal considers just and equitable in all the circumstances having regard to –

(a) the employer's default in refusing to permit the worker to exercise his right, and

(b) any loss sustained by the worker which is attributable to the matters complained of.

(5) Where on a complaint under paragraph (1)(b) an employment tribunal finds that an employer has failed to pay a worker in accordance with regulation … 16(1), it shall order the employer to pay to the worker the amount which it finds to be due to him.

35. Restrictions on contracting out.

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

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

The Decisions

11. We shall now set out a relevant chronology of decisions relevant to these appeals, both by reference to material authorities of higher courts and to the relevant first instance decisions of employment tribunals in these appeals:

(i) On 1 November 2001 there was the decision of the Employment Appeal Tribunal (per HH Judge Clark) in Gridquest Ltd (Trading as Select Employment) and Others v Blackburn and Others ("Gridquest") [2002] ICR 682. This Tribunal held that a provision for rolled-up holiday pay was lawful, and that credit for the rolled-up holiday pay element had to be given, under Regulation 16(5), against the Respondent's liability to make payments under Regulation 16: the issue as to whether the worker was in fact paid a rolled-up rate was remitted to the Employment Tribunal.

(ii) On 30 November 2001, the Employment Appeal Tribunal (again per Judge Clark) in the College of North East London v Leather ("Leather") (unreported EAT/0528/00) concluded that a provision in a contract that there was no entitlement to paid holiday was unlawful by reference to the Regulations.

(iii) Meanwhile there had been the first of the first instance decisions in respect of which there are appeals before us, in Pearce, a decision of the Employment Tribunal at Prestatyn, after a hearing on 14 September 2001 in a Decision promulgated on 11 October 2001: this held that the Applicant had no entitlement to holiday pay, because there was an express agreement that holiday entitlement was to be covered by an enhanced hourly rate. There followed the second such first instance decision, namely in Clarke, a Decision of the Employment Tribunal at London Central, after a hearing on 28 February 2002, promulgated on 15 April 2002. Gridquest in the Employment Appeal Tribunal was cited. The Applicant was held not entitled to holiday pay under the Regulations where a daily rate of pay included a rolled-up element for holiday pay. The Applicants appeal in each case.

(iv) On 28 March 2002, the Scottish Employment Appeal Tribunal (per Lord Johnston) decided an appeal from an Employment Tribunal in MPB Structure Ltd v Munro ("Munro") [2002] IRLR 601. The rolled-up holiday pay provision (an allowance of 8% in each weekly pay packet to provide for holiday pay) was held void by virtue of Regulation 35. Gridquest does not appear to have been cited, and the judgment of Lord Johnston was short:

"2. It has to be said at once that the basis upon which the Tribunal decided the matter was a construction of regulation 13(9)(b) of the Working Time Regulations. That states simply: 'Leave … may not be replaced by a payment in lieu except where the worker's employment is terminated'.

3. Mr Marsh, appearing for the appellants, submitted that the provision in the contract with which we were concerned was not a replacement so as to be caught by reg 13, but merely a different way of paying holiday pay. Mr McEroy, appearing for the respondent employee did not dispute that. It accordingly follows that the tribunal erred in relying upon reg 13 in this context.

4. The question, however, remains as to whether or not the provision is not caught by the overall provisions of reg 35, which render void any provision in the contract which excludes or limits the effect of the Regulations.

5. Having considered the matter, we are of the view that the provisions in this contract can have the effect of limiting the effect of the Regulations. It is clear to us that the basic theme or aim of the Regulations is to ensure that workers obtain appropriate holiday leave and to do so they must have the necessary funds. We consider there is force in the point that by placing the onus of retaining the funds from week-to-week for holiday purposes on the employee, there may well arise the problem of adequate funding at the time of the holiday leave being taken, and this could become compounded if sufficient service in any one year had not been served so as to build up a sufficient entitlement to be the equivalent of a week's wages during the holiday period. We consider that the only way that the provisions of the Regulations and, indeed, their spirit can be met, is for holiday pay to be paid as and when the holiday is taken at the appropriate rate.

6. For these reasons, which differ somewhat from that of the tribunal, we are of the conclusion that the tribunal came to the correct result and that this appeal will be refused."

(v) The first instance decision in Sutton, which was heard by the Employment Tribunal at London South on 3 May 2002 was promulgated on 12 July 2002. The contractual provision was that "as a self-employed person my holiday pay is included within my prices". No reference was made to Gridquest. The Tribunal declined to follow Munro. The Applicant failed and he appeals.

(vi) The Court of Appeal decision in Gridquest was on 23 July 2002, [2002] ICR 1206. The EAT decision was reversed, by virtue of the decision by the Court of Appeal that there was in fact no relevant binding agreement between the employer and worker as to holiday pay. At paragraph 7 Pill LJ said:

"A week's pay is the amount payable by the employer under the contract of employment for the normal working hours in a week. 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."

Mr Langstaff QC for the Applicant sought to persuade the Court of Appeal nevertheless to decide the issue as to whether, if there had been an agreement for rolled-up holiday pay, it would be unlawful, but the Court of Appeal declined to do so, as Pill LJ makes clear:

"14. The court was also requested by Mr Langstaff to go beyond what is necessary to decide the present case. He invited the court to find that in the light of [BECTU] the payment of holiday pay as part of a weekly rolled-up rate is unlawful in any event in that it defeats the object of Directive 98/104. The object of the Directive is to ensure that leave is taken, it was submitted, and the payment of holiday pay by rolling it up in the weekly payment to employees discourages that course. In Scotland the Employment Appeal Tribunal, Lord Johnston presiding, held in [Munro] that … "the only way that the provisions of the Regulations and, indeed, their spirit can be met, is for holiday pay to be paid as and when the holiday is taken at the appropriate rate". There is no reference in the judgment to regulation 16(5).

15. It is not necessary, and I do not consider it appropriate, to embark upon the more general considerations to which that submission gives rise. In these particular cases there was no agreement for the payment of an element of holiday pay by way of a rolled-up rate and the provisions for set-off in Regulation 16(5) does not operate."

(vii) On 30 October and 8 November 2002 there was the first instance hearing in Marshalls Clay by the Employment Tribunal at Manchester, whose Decision was promulgated on 12 December 2002. Both Gridquest and Munro were cited. A provision for rolled-up holiday pay (of 88.6p of the hourly rate) was held void. Unlike Lord Johnston in Munro however (paragraph 2 cited at (iv) above), the Tribunal placed its reliance on a finding of breach of Regulation 13(9)(b). The Respondent appeals.

(viii) On 13 December 2002, there was the first instance hearing at the Employment Tribunal at Brighton of Blue Sword. The Decision was promulgated on 7 January 2003. Gridquest and Munro were both cited, and the two EAT Decisions were seen to be irreconcilable. The Tribunal preferred the "reasoning adopted in the Munro case as it seems to me that the underlying rationale of the Regulations is to make statutory provisions for holidays to be taken and payment is subsidiary to that aim". However the Tribunal considered that this was no general principle such as to invalidate any provision for rolled-up holiday, and concluded as follows in its Decision:

"12. This general principle may be modified by the needs, requirements and special circumstances of any particular case. In my view the general principle applies where the work is, or is intended to be, of a continuing nature and the worker is, or is likely to be, in the same employment for a whole year or substantial part of it ...

13. The present circumstances are, however, different. Workers such as the Applicants move from job to job as and when it suits them. They do not expect to remain with the same 'employer' on a long-term basis and move with him from site to site. The relationship has a transient element to it …

15. … With the transient nature of their employment it would, in my opinion, place an unwarranted accounting duty on the Respondent to keep precise records of the time they worked and to calculate holiday pay as and when each worker left the Respondents' employment. In the circumstances of these Applicants, I therefore prefer the reasoning in Gridquest and find the Respondent was entitled to pay 'rolled-up' holiday pay which I find as a fact it did. No further entitlement is therefore due."

The Applicants appealed.

(ix) The last of the first instance Decisions, namely that in Hoy, resulting from a hearing at the Employment Tribunal at Ashford, Kent, on 28 February 2003, was promulgated on 26 March 2003. The Tribunal concluded that a provision which it found to have been agreed between the Applicant and the Respondent, that his rate of pay included holiday pay, was not unlawful. Gridquest, but not Munro, was referred to. The Applicant appeals.

(x) On 1 April 2003 the Inner House of the Scottish Court of Session delivered judgment in the appeal in Munro, XA80/02 unreported. The Inner House did not follow the conclusion of either the Employment Tribunal (in its reliance on Regulation 13(9)(b)) or Lord Johnston (in his reliance on Regulation 35), but dismissed the appeal by reference to its construction of Regulation 16(1). The Lord President after setting out Article 7 of the Directive (which we have quoted in paragraph 4 above) continued as follows, in his judgment:

"13. … 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 Regulation 13, whereas the entitlement to payment is created by Regulation 16. The wording of the Directive strongly suggests, in our view, a close association between the two. The submission made by Mr Truscott on behalf of the respondent [i.e. the applicant] was that workers had the right to be paid for annual leave at the time when 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 Regulation 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 with 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, scope for Member States to regulate certain matters. However, we are of the opinion that it is essential not only 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.

16. The remaining issue is as to the consequence of the conclusion that the arrangement was not in accordance with Regulation 16(1). In our view, the arrangements set out in the form of contract which applied to the respondent's employment, which expressly provided for the rolling-up of holiday pay, purported to exclude the operation of Regulation 16(1). It follows that para 1.5 was, for this purpose, void. If so, it follows, in our view, that the respondent's rate of pay did not to any extent qualify as discharging any liability of the appellant in respect of holiday pay under Regulation 16(1). It also follows that the respondent's claim in respect of holiday pay remains unsatisfied. If it were otherwise, it would be possible, in effect, for an employer to defeat the intention of the Regulations and the Directive that payment for annual leave should be an association with the taking of that leave."

12. Mr Carr, on behalf of the Applicants in the Marshalls Clay case sought to defend the decision of the Employment Tribunal, to which we have referred in paragraph 11(vii) above, but not by reference to Regulation 13(9)(b), which was the basis upon which the Applicants argued the matter before the Tribunal, and upon which the Tribunal found in the Applicants' favour. He sought to rely, as will appear, upon Regulation 16(1), and the construction of it which found favour with the Inner House in Munro. This was thus a new argument, not run below. As such, his desire to rely upon it fell within the well-established principles most clearly enunciated in Kumchyk v Derby City Council [1978] ICR 116, which have long governed the operation of the Employment Appeal Tribunal, as it was an argument which, although not at that stage blessed by the approval of the Inner House of the Court of Session, could perfectly well have been run before the Tribunal. It is rare, pursuant to the practice in Kumchyk (especially as considered by Arnold J at 1123-4) that such a new point will be allowed to be run on appeal, even if it does not depend upon factual evidence which would need to be further considered. Mr Carr did not suggest that the decision of the Inner House was binding upon this Appeal Tribunal, he simply sought to rely upon what he submitted to be the correctness of the argument which found favour with the Inner House. Miss Eady, after taking instructions, did not oppose that position. This sensibly enabled this Appeal Tribunal to consider the question of rolled-up holiday pay, taking into account all the arguments, and to resolve the outstanding questions on their merits, without technicalities as to what submissions could or could not be run before us. That enabled us to have a full argument on 10 June in Marshalls Clay (and to the limited extent above referred to Blue Sword), and enabled us to reach a provisional conclusion on what we had heard, albeit that we reserved judgment in the light of the impending argument on 25 June. Mr Hogarth QC, at the latter hearing, has however sought to contend, not only that he should be entitled to rely upon the new Munro argument before us, notwithstanding that in the case of the four appeals in which he was appearing, Pearce, Clark, Sutton and Hoy, no such contention was run below at the relevant Tribunals, but further that this Appeal Tribunal is bound by the decision of the Inner House.
13. Although it is clearly the case that an Employment Tribunal is bound by decisions of the Employment Appeal Tribunal, whether sitting in London or in Edinburgh (see Davidson v City Electrical Factors Ltd [1998] IRLR 435), no authority was cited to us for the proposition that the Employment Appeal Tribunal in England, which is clearly bound by decisions of the English Court of Appeal, to whom appeals from it are directed, is bound (as opposed to materially influenced and persuaded) by the decisions of the Scottish Inner House to which it is not so answerable. Mr Hogarth QC argued the matter before us by reference to decisions in revenue cases and the opinion of the Editors of Halsbury's (4^th Edition Reissue at Vol. 37 paragraph 1250) that an English Court ought to follow the unanimous judgment of the higher Scottish and Northern Ireland Courts where the question is one which turns on the construction of a statute which extends to those countries as well as to England. He submitted that the contrary view would give rise to an "unacceptable degree of judicial schizophrenia". We do not propose to decide the question as to whether we are bound by the decision of the Inner House. Just as in Marshalls Clay, where permission to rely on the new contention was given on the basis that we would consider, but not be bound by (such not being suggested), the new Munro point, so, in the four other appeals before us, we have allowed the new Munro point to be run, but only on the basis that it should be relied upon as persuasive, but not binding on us. This is with a view to our doing our best, in the light of all the jurisprudence to which we have referred and the very helpful arguments of all Counsel and indeed representatives before us, to reach what we conclude to be the right answer. In any event we have had the benefit of consideration, not of one case as in Munro, but six, with all the more detailed opportunity to look at the problems to which any particular construction of the Regulations might give rise, or the matters which need to be taken into account before arriving at any such interpretation.
14. It is against the background, and with the benefit, of that full consideration of all these cases, that Mr Hogarth QC has put forward an extremely helpful analysis of the five categories of contract which need to be considered, in the context of the issue of the lawfulness of provisions relating to holiday pay pursuant to the Regulations, which we have been very happy to adopt:

(i) Category 1: Contracts between the worker and the employer which are silent in relation to holiday pay.

(ii) Category 2: Contracts which purport to exclude any liability for or entitlement to holiday pay.

(iii) Category 3: Contracts where the rates are said to include holiday pay, but there is no indication or specification of an amount.

(iv) Category 4: Contracts providing for a basic wage or rate topped up by a specific sum or percentage in respect of holiday pay.

(v) Category 5: Contracts where holiday pay is allocated to and paid during (or immediately prior to or immediately after) specific periods of holiday.

15. The normal contractual arrangements, whereby employees are paid, for example, monthly, and then make arrangements to take their annual leave and continue to be paid during it, are obviously Category 5 contracts. The case of Gridquest was perceived by the Employment Appeal Tribunal to fall at least within Category 3, if not Category 4 (although sent back for further enquiry), but was concluded by the Court of Appeal, by virtue of their construction of the contract, to fall within Category 1. The cases that can, without further consideration, be allocated to one of the categories are as follows: Leather and Pearce fall into Category 2: Sutton and Hoy fall within Category 3. Munro, it appears, and certainly Marshalls Clay fall into Category 4. We shall return later to Blue Sword and Clarke.

Marshalls Clay

16. We turn to specific consideration of Marshalls Clay. The Respondent is a manufacturing company, with a requirement for constant working. Consequently, as a result of long-established practice, and agreement with the relevant unions, the working arrangements have been for employees to work four days on and four days off. Their individual contracts of employment are headed up "CONTRACT TYPE – WORKS 4 on/4 off Days", and the provision by paragraph 8 of such individual contracts of employment with regard to holidays recites: "The non-working days included within your work roster comprise your entitlement to holidays and rest days, as established at the time of commencement of this work pattern. In addition, you are entitled to two personal days which can be taken on a rostered working day subject to the agreement of your supervisor/manager. You are also entitled to two statutory days to be taken on Christmas Day and New Year's Day". Incorporated into the individual contracts of employment, by paragraph 15, are the relevant Collective Agreements. By paragraph 3 of the Terms and Conditions of Employment for Whinney Hill Factory, the following is provided as to 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.

Statutory bank holidays are only taken off if they coincide with rest days in the rota system. The exception to this will be Christmas Day and Boxing Day, as the plant will close (unless it is decided mutually that Christmas Day and New Year's Day are more favourable), with the exception of security personnel who will cover the plant 365 days per year (366 in leap years)."

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 days 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.

19. The Tribunal at first instance in Marshalls Clay (as appears in paragraph 11(viii) above) concluded that these provisions were in breach of Regulation 13(9)(b), but such submission was not pursued or relied upon by Mr Carr, just as it was not relied upon on appeal at the Employment Appeal Tribunal in Munro. It is plain that this carefully negotiated provision for the taking of leave could not possibly be described as being an agreement which replaced entitlement to take leave, including entitlement to take leave in instalments, by a payment in lieu. Regulation 35(1), which we have cited at paragraph 10 above, only renders an agreement void "insofar as it purports … to exclude or limit the operation of any provision of these Regulations", and even then only insofar as the Regulations do not provide for an agreement to have that effect. If the contractual remuneration is lawful then it is permitted, and can be offset against the employer's statutory obligation to pay holiday pay pursuant to Regulation 16(5). Miss Eady has drawn attention to Sutherland v Network Appliances Ltd [2001] IRLR 12, which deals with a similar provision to s35(1), namely s203(1) of the Employment Rights Act 1996, which provides that "any provision in an agreement … is void insofar as it purports to exclude or limit the operation of any provision of this Act". She points to the clear exposition in that case at paragraph 9 by Lindsay P whereby he emphasises that:

"It is not that any agreement which includes a requirement in contravention of s203(1) is totally void; at most it is only the provision within the agreement which is to be void. Further, it is not even that the whole of any separate identifiable provision which includes a requirement in contravention of s203 is made void, but only that provision 'insofar as it purports' so to exclude or preclude in contravention of s203. It is not void 'if it so purports' but only 'insofar as it so purports' that it is to be void."

20. Even if, contrary to our conclusion (and, as we have said, Mr Carr did not in the event seek to argue to the contrary), the provisions in the Marshalls Clay agreements did on the facts have an effect contrary to Regulation 13(9)(b), steps could and would be taken by the employers to avoid, or render even less likely, such a possibility. Miss Eady has indicated in the course of argument that the Respondent would be ready to take steps, and indeed on her instructions already do take steps, to avoid the possibility that workers would not take holidays, by preventing them from taking other peoples' shifts over and above a certain number, or without first taking a holiday themselves. Similar points were taken in the extremely helpful skeleton argument in Blue Sword by Mr Camp for the Respondent in that appeal, whereby he made suggestions, to which we shall return below, for facilitating and tracking the payment of rolled-up holiday pay and its effect, by ensuring that records of holidays taken were kept and that workers were required to take holidays. It is quite clear to us that Regulation 35 of itself, contrary to the conclusion of Lord Johnston in Munro in the Employment Appeal Tribunal, cited in paragraph 11(iv) above (which conclusion itself was not taken up or approved by the Inner House in that case) can only be a starting point. Regulation 16(5) plainly allows for contractual remuneration, and for it to be offset. The question is whether the particular contractual arrangement offends against any particular provision of the Regulations, so as to be rendered void by Regulation 35. Mr Hogarth QC in the other four appeals did not in the event dissent from this proposition during oral argument before us. We are satisfied that neither Regulation 13(9)(b), nor any 'standalone' approach to Regulation 35 to encapsulate the spirit of the Regulations, renders the Marshalls Clay provision void.
21. It is apparent that, although the five categories of contract had not been formulated at the time of the argument before us in Marshalls Clay, but only subsequently by Mr Hogarth QC, the Marshalls Clay provision is a Category 4 contract. It is plain that, if lawful, it provides considerable advantages in a shift situation, such as Marshalls Clay, which is plainly far from unusual in the manufacturing industry:

(i) While securing the shift system, and a full time operation of the works, for the employer, it achieves flexibility for the employee, and increases his or her holiday options. He or she could simply take 90 days off and do nothing further or could arrange his or her consecutive periods, but on either basis will be paid in full his or her holiday pay, accruing over the year.

(ii) There is plainly administrative convenience for the employer.

(iii) There is in the event extra pay for the workers, since their overtime rate is paid on the basis of the enhanced hourly rate, thus enhancing all overtime pay throughout the year.

22. The argument that is now run on the Marshalls Clay appeal by Mr Carr (overriding the Kumchyk point, as discussed in paragraphs 12 to 13 above) and in the other four appeals by Mr Hogarth QC, similarly, is that the provisions are in breach of Regulation 16(1) as interpreted by the Inner House in the Munro appeal. Regulation 16(1), which provides that "a worker is entitled to be paid in respect of [his four weeks' annual leave] at the rate of a week's pay in respect of each week of leave" is, he submits, to be interpreted on that basis as meaning "entitled to be paid in association with the taking of that leave" (per the Lord President at paragraph 14) and indeed it seems (by reference to the Inner House's acceptance of Mr Truscott QC's submissions, set out at paragraph 13) "at the time when it is taken". As was accepted in the course of argument, and indeed is a necessary concomitant, if such be right then Regulation 16(5), which is the provision for set-off against contractual remuneration, must be construed similarly. Thus no credit is to be given in respect of any holiday pay which is not paid at the time of the holiday being taken and in association with it.
23. This is of course not, on the face of it, what Regulation 16(1) says, nor, on the face of it, is Regulation 16(5) so limited. Both of them only relate to an entitlement to be paid "in respect of" a, or any, period of, leave i.e. any period of leave must be paid for. It is plain that a purposive construction must be applied to the Regulation in order to arrive at the conclusion that there must be specific appropriation to a particular period, and payment at the time the leave is taken.
24. Both by reference to the Lord President's judgment and in any event by virtue of their own submissions, Counsel for the respective Applicants submit that this purposive construction is required in order to ensure for health and safety reasons that workers take their paid leave. It is submitted that:

(i) On a rolled-up holiday basis the worker may be encouraged to work through and take no holiday.

(ii) The worker may not be able to take his holiday early in the year, because he may not by then have saved up enough, since his holiday pay is paid progressively during the year.

(iii) The worker may not be able to take his holidays later in the year, as he may by then have spent what he had been paid earlier in the year. This, understandably characterised by the Respondents as somewhat paternalistic, attitude, is plainly what appears to have motivated Lord Johnston, in paragraph 5 of his judgment in Munro in the EAT. As it happens, in Marshalls Clay there was an option given under paragraph 2.6 of one of the collective agreements (of 29 May 1984) whereby "the Union representatives' views are welcomed on … the Company retaining a proportion of net earnings of holiday fund for employees". It is perhaps noteworthy that this was never taken up.

25. Reliance is placed upon Article 7(1) and (2) of the Council Directive, cited in paragraph 4 above, as emphasising the tie-up of leave and payment, even though in the event the Regulations dealt with holiday entitlement in Regulation 13 and with provision for payment in Regulation 16.
26. Considerable reliance was placed by the Respondents in the appeals on the consequences of a decision that rolled-up holiday pay is unlawful:

(i) Miss Eady emphasised that this would result, in relation to those who have already been paid in the past for holiday pay as part of their remuneration, and are now to receive it over again, without credit being given under Regulation 16(5), in double payment. It was actually Mr Gallagher, the Directive of Frank Staddon Ltd who acted as its representative in the Clarke appeal, who made the irrefutable and even more powerful comment that in fact it would result, not in double pay, but in treble pay. At any rate in relation to a Category 4 case (which Mr Gallagher asserted the Clarke provision to be) there would be no doubt that the pay had been enhanced by the amount of holiday pay. If the employee were now to be awarded the same amount again, i.e. the totality of the hourly or daily rate, he will have been paid for the holiday three times, once by now being awarded basic rate in respect of his holiday period, once by having already received holiday pay included in the earlier pay, and once by receiving the holiday pay enhancement as part of the award of the total rate by an Employment Tribunal.

(ii) Even apart from such adventitious benefit to those who have received payment in the past, Miss Eady pointed out the predicament in which employers will now be, who seek to renegotiate the position. Quite apart from the fact that they cannot in any event unilaterally reduce hourly rates of pay in order to fund holiday pay (see Davies v M J Wyatt (Decorators) Ltd [2000] IRLR 759), even those employers who fall within Category 4, and have plainly separately identified an amount for holiday pay as part of the total rate, will, as a matter of industrial reality, be faced with difficulties in relation to renegotiation of such agreements, and the inevitability or likelihood of an increase in rates, or rather an increase in remuneration, because there will now be holiday pay as well as the whole of the existing rate remaining unreduced.

27. However these difficulties must not stand in the way of the courts, if in fact employers have been misconstruing the Working Time Regulations in relation to rolled-up holiday pay, and must change in order to act lawfully. We must decide whether the now suggested purposive construction of Regulation 16(1) and (5) is correct.

The Construction of the Regulations

28. The starting point is, as set out above, that it is not in terms what the Regulations say, and if it had been required that the payment had to be tied to a specific and identified period of holiday, they could so easily so have provided. The period in respect of which the employee is entitled to be paid is all of his or her four weeks annual leave. Regulation 16(5) provides for the offsetting of "any [our underlining] contractual remuneration paid to a worker in respect of a period of leave" against any liability of the employer to make payment under Regulation (16)(1) in respect of that period.
29. In terms of the suggested purposive construction, Health and Safety is only a part of the preamble to the Directive, referred to in the first, fifth and eighth "whereas" cited in paragraph 3 above. The second "whereas" recites that the Directives are to "avoid imposing administrative, financial and legal restraints in a way which would hold back the creation and development of small and medium-sized undertakings", and the seventeenth "whereas" couples Health and Safety with flexibility.
30. The Member State is given flexibility in relation to the mechanics of the operation for implementation of the Directive, as is clear from the passages in BECTU cited in paragraph 5 above. Thus the Directive cannot be intended to prevent a system of four days on/four days off, or lay down any one way of making payment in respect of leave. Of course the most common employment pattern, at a time when salaried employment is increasing and traditional manufacturing remuneration patterns are atrophying, is for workers simply to take their weeks off, receiving their standing order into their bank in respect of that period while they are away, just as if they were working. But that is, even in these days, by no means the uniform system of employment.
31. The consequence of a breach of the Regulations is financial (see Regulation 30(1)(b) and (5) cited in paragraph 10 above), not a mandatory order for extra holiday; and in fact no loss is suffered by the breach complained of, if it be a breach (indeed rather a double or indeed a treble recovery). This suggests that the significant factor is being paid for sufficient holidays.
32. Even if an employee is paid his holiday pay by appropriating it to a specific period, that does not per se prevent him from coming into work during that period and being paid. It is Regulation 13(9)(b) (deriving from Article 7(2) of the Directive) which would be likely to be what would prevent that, not Regulation 16(1) itself, even if construed as suggested.
33. The advantages referred to in paragraph 21 above would be lost. Indeed it may well be that, up and down the country, employees may prefer being paid, whether pro rata or otherwise, in advance in respect of a holiday period, in order to be in a position to pay for such holiday in advance, either by way of deposit or indeed in total, as is so often now necessary. So far as the advantage of "administrative convenience" is concerned, that is of no little significance in relation to the Marshalls Clay case. It is necessary to ask how the necessary appropriation of pay to day would be done, in relation to a four day on/four day off shift with provision for the alternative of consecutive entitlement, as per the Marshalls Clay scheme. While neither the Applicants nor Mr Carr could be expected to give accountancy advice, nevertheless in the course of argument no satisfactory alternative could be suggested. The Marshalls Clay and many other similar schemes are of course, as discussed above, quite different from where there is simply a five day week and an entitlement to four weeks holiday.
34. If the construction of Regulation 16(1) contended for by the Applicants be right, then it must be universally applicable. In this context it is worth contrasting the conclusions of the Employment Tribunal in Blue Sword at paragraphs 12 following, which we have set out at paragraph 11(viii) above, which make persuasive reading. If, however, the 16(1) construction be right, then there would be no such flexibility as the Chairman in that case in any event settled for, for the reasons he gives. The submissions of Mr Camp for the Respondent in Blue Sword are worth further citation:

"2(d) Allowing rolled-up holiday pay with appropriate conditions … actually serves to enhance compliance to Article 7.1 "Member States shall take the measures necessary to ensure that every worker is entitled to paid annual leave of at least four weeks".

(e) The learned Chairman was correct in recognising that for "transient" workers, a rolled-up rate of pay is the most appropriate and fair method for an organisation to discharge its duty under the Working Time Regulations".

The proposition clearly is that, where there are short term or transient workers, they may finish or disappear before they can claim or receive any holiday entitlement or holiday pay, but will thus have received a relevant proportion as part of their basic pay, insofar as the provision is lawful, and, as we have said, Mr Camp for Blue Sword made certain suggestions, as did Miss Eady, to which we shall return. Mr Hogarth QC submitted in his skeleton that "any other conclusion" than the suggested construction of Regulation 16(1) "would conflict with the prohibition on payment in lieu of holiday in Regulation 13(9)". But so far as a Category 4 contract is concerned, and certainly on the facts of Marshalls Clay, as discussed above, that would not be the case. In any event, as discussed above, the flexible instrument of the use of Regulation 13(9)(b) and Regulation 35(1) would achieve the purpose far better than the blunt instrument of the suggested construction of Regulation 16(1) which would outlaw all rolled-up holiday provisions.

35. Mr Hogarth QC's primary submission (fortified by the fact that certainly in three of the four cases in which he was instructed there were plainly Category 2 or 3 contracts) is that:

"The primary purpose of these Regulations is to ensure that all employees take four weeks holidays each year and that they are paid for it. Any contractual provision which leads to a different result is void. Any other conclusion deprives the Regulations of any practical effect. A contractual provision which states "holiday pay is included in your basis pay" would be effective."

36. In our judgment, such criticism would not apply to a Category 4 contract.
37. Our conclusions are as follows:

(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): or there may be a breach of s13(9)(b) and/or any such provision so purporting would then itself be void in accordance with 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 Marshalls Clay 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, cited in paragraph 7 above.

(ii) We would however take this opportunity to give guidance for the future to employers, and indeed trade unions and employees, with regard to rolled-up holiday provisions, in order both to minimise the risk of any such contractual remuneration not qualifying under Regulation 16(5) and in particular, with a view to Health and Safety and the provisions of Regulation 13(1) and in particular Regulation 13(9)(b) to avoid a breach of those Regulations, and hence pro tanto avoidance under Regulation 35(1)(a); in particular any payment made to or agreed with an employee instead of taking a holiday, or with that effect, would be void. In this regard we are grateful to the submissions of Miss Eady for the Respondent in Marshalls Clay and to the written submissions of Mr Camp in Blue Sword, which we have adapted as follows:

a) The rolled-up holiday pay must be clearly incorporated into the individual contract of employment, and thus expressly agreed.

b) The allocation of the percentage or amount to holiday pay must be clearly identified in the contract, and preferably also in the payslip.

c) It must amount to a true addition to the contractual rate of pay.

d) Records of holidays taken must be kept.

e) Reasonably practicable steps must be taken to require the workers to take their holidays before the expiry of the relevant holiday year.

CONCLUSIONS IN THE INDIVIDUAL APPEALS

38. Marshalls Clay. We do not construe Regulation 16(1) so as to require the Respondent 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 provision for rolled-up holiday pay in this Category 4 contract, identifying an express percentage by way of an addition to basic pay, is not offensive to the Working Time Regulations and the appeal must be allowed.
39. Blue Sword. As appears from paragraph 1 above, in the circumstances this appeal has not been substantively before us. Judge Reid concluded in his judgment (EAT/0213/03 unreported 14 July 2003) that there was no provision for rolled-up holiday pay incorporated into the Applicants' contracts.
40. As appears clear from the brief summary of the facts we have set out in paragraph 11 above, Pearce is a Category 2 case and Sutton and Hoy are Category 3 cases. The Respondents in such cases can neither show there has been compliance with Regulation 16(1), nor that they have paid, nor indeed are obliged to pay, any contractual remuneration within Regulation 16(5). The provisions in Sutton and Hoy, simply that holiday pay was included in the pay or prices, were plainly insufficient: no amount for holiday pay was in either case specified or agreed. The provision in Pearce, which purported to exclude liability to pay holiday pay was void pursuant to Regulation 35(1)(b). The Applicants' appeals in all those three cases are allowed.
41. We finally turn to Clarke. We were very grateful for the concise and lucid submissions of Mr J Gallagher. In the light of our conclusions, namely that a Category 4 contract does not (or not automatically) offend against the provisions of the Working Time regulations, we are satisfied that this case must be referred back to the Employment Tribunal for further consideration, albeit that we presently see no reason why it should not be referred to the same Employment Tribunal and be subject to the findings of fact already made, but to be further interpreted in the light of guidance from this judgment. There are two issues in relation to this case:

(i) Whether there is or was a Category 4 contract agreed between the parties (as opposed to being unilaterally imposed by the employer), whether from 2 April 2001 or from 1 June or 21 June (see the statement of Ms Williams dated 20 February 2002) or an (unspecified) date in August 2001 (see paragraph 9(8) of the Decision). There requires to have been, in accordance with the guidelines set out above, specific agreement of a rate or percentage in respect of the rolled-up holiday pay. On a document which is page 90 in our bundle there is annotated in handwriting (at a date which is not presently clear to us) the words "basic 8.689 hol pay 0.756 = £85 per day". There is also one payslip with the same breakdown, but it is apparently dated 16 August 2001. Both these breakdowns apply only to the £85 which was said to be the increased rate agreed as from 24 July 2001, and thus do not of themselves assist in relation to the period from 2 April to 23 June. More detailed findings will be necessary by the Tribunal.

(ii) Whether there was a break in the continuity of employment. Findings are made by the Tribunal with regard to what occurred, as a matter of fact, by reference to paragraphs 9(7), 11 and 12 of the Decision, the issue being whether the Applicant was on holiday from 23 June 2000 to 24 July 2001 or whether, as is, it is said and was found, so frequently the case in relation to the self-employed under a CIS contract, he left without commitment or promise of further work, and then returned and was re-engaged. On this question depends whether there can be a claim for holiday pay (if there be one) in respect of the earlier period or whether it is statute-barred and/or whether he would be entitled to a claim in respect of the period of 24 July to 16 November 2001. The issue which may need to be revisited would be whether, if and insofar as there was a rolled-up holiday pay provision (whether lawful or otherwise) in respect of the period April to June, the effect of the holiday entitlement impinges in any way upon the contractual status of the period between 23 June and 24 July, irrespective of what the parties thought or said (although given the shortness of his employment any such contractual impact may be unlikely).

The result is that after a reference back to the Employment Tribunal it is possible (but, in the light of the findings of fact, unlikely) that there may be recovery by the Applicant in respect of the earlier period, or there may (subject to the fresh findings of fact relating to whether the provisions amount to a Category 4 contract) be recovery in relation to the later period. For the purpose of remission of the case back to the Employment Tribunal for further consideration, the Clarke appeal is, but only to that extent, allowed.