United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR ANDREW HOGARTH (One of Her Majesty's Counsel) Instructed by: Messrs O H Parsons & Partners 3rd Floor Sovereign House 212-224 Shaftesbury Avenue LONDON WC2H 8PR
For the Respondent	MR JAMES ENGLEFIELD (Director)

SUMMARY

Working Time Regulations – Holiday pay

The appellant claimed that rolled up holiday payments made by his employers could not be set off against his right to holiday pay conferred by the Working Time Regulations 1998. The Employment Tribunal held that this depended upon whether the payments were contractual and met the criteria of transparency and comprehensibility laid down by the ECJ in Robinson-Steele v R D Retail Services Limited [2006] ICR 932. The appeal turned on whether the contract satisfactorily identified the sums referable to the holiday period. The EAT held that they did and dismissed the appeal.


 


THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)

1. This case raises a short point. The appellant, who was the claimant below, was employed by Englefield Brickwork Limited ("the company"). He received what is colloquially known as 'rolled up holiday pay'; in other words, a payment which was stated to be in part wages for the work done and in part a payment in respect of holidays not yet taken. He subsequently took proceedings for breach of the Working Time Regulations 1998, alleging that he had not been paid for the leave to which he was entitled when his contract ended after he had worked for the company for seventeen weeks.
2. The issue for the Tribunal was whether they could properly take into consideration and set off against that sum the payments which the employers contended were contractual and attributable to the holiday period. The Tribunal found that they could. It was common ground that on that premise there was no residual payment due under the Regulations.
3. The grounds of appeal contend that the Tribunal erred in law in that they were not entitled to reach the conclusion that the payments made by the employers were contractual payments sufficiently attributable to periods of holiday.

The law

4. Before considering the facts in a little more detail, we set out the material law. The Working Time Regulations are designed to give effect to Council Directive 93/104/EC. Article 7 of the Directive provides as follows:

"(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. Regulation 13 provides as follows:

"(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."

Regulation 16 provides:

"(1) A worker is entitled to be paid in respect of any period of annual leave to which he is entitled under regulation 13" – ie four 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 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."

6. Regulation 35 renders void any provision in an agreement which is designed to exclude or limit, or has the effect of excluding or limiting, the operation of any provision of the Regulations.
7. In Robinson-Steele v R D Retail Services Limited [2006] ICR 932 the European Court of Justice was asked to answer three questions concerning the operation of the Directive. The first was whether part of the remuneration payable to a worker for work done could be attributed to annual leave without any payment being made additional to that for the work done. Hardly surprisingly, the Court held that it could not; in order to comply with the Directive there had to be a sum paid which was over and above the remuneration payable for the work done. Otherwise there would be a derogation from the entitlement under the Directive. Moreover, if there is no separate payment identified referable to holidays, there can be no subsequent allocation of part of the remuneration to holidays, even by agreement.
8. The second question was whether the provisions of rolled up holiday pay was in accordance with the Directive or whether the payment should be made in respect of a specific period during which the worker actually takes leave. The European Court noted that there was no provision in the Directive specifically identifying how the payment should be made, but nonetheless held that the proper construction of Article 7 did not permit a rolled up payment:

"[Article 7] precludes the payment for annual leave within the meaning of that provision from being made in the form of part payment staggered over the corresponding annual period of work and paid together with the remuneration for work done rather than in the form of a payment in respect of a specified period during which the worker actually takes leave."(para 63)

9. The final question concerned the status of the payments made to a worker under the rolled up holiday pay arrangements. Notwithstanding that payments made in that way were incompatible with the Directive, could they be set off against the entitlement to payment for a specific holiday period conferred by the Directive itself?
10. The Court held that in appropriate circumstances they could. They identified those circumstances as follows (paras 62-65):

"The question is therefore whether payments in respect of minimum annual leave, within the meaning of that provision, already made within the framework of such a regime contrary to the Directive, may be set off against the entitlement to payment for a specific period during which the worker actually takes leave.

In that situation, article 7 of the Directive does not preclude, as a rule, sums additional to remuneration payable for work done which have been paid, transparently and comprehensibly, as holiday pay, from being set off against the payment for specific leave.

However, the member states are required to take the measures appropriate to ensure that practices incompatible with article 7 of the Directive are not continued.

In any event, in the light of the mandatory nature of the entitlement to annual leave and in order to ensure the practical effect of article 7 of the Directive, such set-off is excluded where there is no transparency or comprehensibility. The burden of proof in that respect is on the employer."

11. Two of the cases considered by the Court of Justice in Robinson-Steele had been referred to them by the Court of Appeal on an appeal from the Employment Appeal Tribunal. The EAT (Burton P) had considered five unrelated appeals concerning annual leave entitlement under the title of the lead case, Marshall's Clay Products Ltd v Caulfield [2004] ICR 436. In fact the EAT held - wrongly in view of the subsequent decision of the ECJ - that rolled up holiday pay was not incompatible with the Directive. The court went on to consider the circumstances in which holiday pay made in that way could be set off pursuant to regulation 16(5) against any entitlement to remuneration under the Regulations as Robinson-Steele makes clear, such set off is permitted even although rolling up the pay contravenes the Directive.
12. The EAT first identified five different categories of case which might typically arise with respect to rolled up holiday pay:

"14 "….Mr Hogarth 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 1998 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."

13. The EAT later analysed the extent to which these categories were consistent with obligations under the Regulations as follows (para 37):

"(i) Mr Hogarth's categories 1, 2 and 3 fall foul of the 1998 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 regulation 13(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 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…."

Plainly the fifth category is compatible with the obligations under European law.

14. The EAT then gave guidance as to how to ensure that payments made could be set off as falling within the scope of regulation 16(5):

"37 …(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 … to minimise the risk of any such contractual remuneration not qualifying under regulation 16(5)……

(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; and (e) reasonably practicable steps must be taken to require the workers to take their holidays before the expiry of the relevant holiday year."

15. In a later case, Smith v J Morrisroes & Sons Ltd [2005] ICR 596, which concerned three unrelated appeals, the EAT (Burton P) again had to consider the circumstances in which claims for annual leave entitlement were made. It is not necessary to set out the facts of each of those cases. However, the court thought it appropriate to reconsider the guidelines that had been laid down in the earlier Marshalls Clay case and to reformulate them as follows (para 5):

"There must be mutual agreement for genuine payment for holidays representing a true addition to the contractual rate of pay for time worked. The best way of evidencing this is for:

(a) the provision for rolled up holiday pay to be clearly incorporated into the contract of employment;

(b) the percentage or amount allocated to holiday pay (or particulars sufficient to enable it to be calculated) to be identified in the contract and preferably also in the payslip;

(c) records to be kept of holidays taken (or of absences from work when holidays can be taken) and for reasonably practicable steps to be taken to ensure that workers take their holidays before the end of the relevant holiday year."

It will be noted that the changes, although minor, make it plain that the conditions identified in (a) to (c) are the best evidence of a proper and compliant agreement. The essential question is whether there is a true agreement providing a genuine and identifiable payment for holidays. These are guidelines: they do not purport to lay down the only way in which the existence of such an agreement can be established.

16. It is fundamental, as the language of regulation 16(5) itself makes clear, that if any set off is to be permitted, the payment made by the employer referable to holidays must be contractual. In Gridquest Ltd v Blackburn [2002] ICR 1206 the Court of Appeal held that it was not open to an employer unilaterally to specify a sum referable to holidays and to seek to set that off against the entitlement under the Regulations. The payment had to be contractually agreed between employer and employee. Pill LJ said this:

"7. …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. In my judgment, regulation 16(5) does not confer that right upon an employer. Indeed, it expressly refers to "contractual" remuneration paid in respect of a period of leave. 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. The remuneration under the contract is for the week's work."

Although pre-dating the Robinson-Steele case, this authority is entirely in accordance with it.

The Tribunal decision

17. The Tribunal noted that it was agreed that pursuant to the Regulations the claimant was entitled to six days' annual leave during the period of his employment with the company. They made certain express findings of fact.
18. When the claimant had commenced employment, this was further to a conversation he had had with the foreman subcontracted to the respondent. The Tribunal found as a fact, and contrary to the evidence given by the appellant himself, that he was told that the rate would be £135.00 per day, but that this would include holiday pay. However, no detail was given at that time as to the rate of the holiday pay or how it was to be calculated.
19. Mr Needham, the foreman, told the Tribunal that it was his practice to explain the situation to employees at a later date. No written contract or written particulars of employment were ever produced.
20. The claimant was paid weekly by cheque in a pay packet. The pay packet showed the amount of the basic wage, holiday pay added, deductions made due to tax and the net amount owing (save for one occasion when no such information was provided, which the Tribunal accepted was a simple oversight.) This information was prepared at the respondent's main office using a computer programme. The appellant worked for a total of seventeen weeks for the company. He took two weeks leave and no extra payment was made in respect of that period. He did not at any point query the method of calculation of his holiday pay. He contended that this was because of fear of dismissal, but the Tribunal categorically rejected that evidence.
21. The Tribunal was apparently referred to the various authorities to which we have made reference. However, the only authority which they expressly mentioned was the decision of the Court of Justice. The Tribunal concluded that the key question they had to determine was whether the payment of rolled up holiday pay had been implemented "transparently and comprehensively". Their conclusion was that it had (paras18-20) :

"The Tribunal's conclusion is, notwithstanding the fact that the rate of holiday pay and the exact calculation of its sum on the pay packets are not expressly stated, the payments were sufficiently transparent in that exact sums were stated with corresponding descriptions (eg 'holiday £56'), the claimant accepted payment on that basis with no challenge throughout his employment and, in particular, accepted the lack of any extra payment during the period of his leave without challenge.

As to whether the payments were comprehensible, the Tribunal considers the same factors to be relevant, but the claimant's counsel also referred the Tribunal to the existence of one blank pay packet. In the Tribunal's view this does not change the position materially.

In all the circumstances therefore, the Tribunal find that while rolled up holiday pay should not have been used to satisfy the claimant's statutory entitlement to annual leave, the respondent is entitled to set off the amounts they have paid in that way against the entitlement, as the payments were sufficiently transparent and comprehensible."

22. Accordingly, there were no further sums owing to the claimant and the claim was dismissed.

Grounds of appeal

23. Mr Hogarth QC, counsel for the appellant, contends that the Tribunal simply failed to have regard to the relevant domestic authorities, to which we have referred. The Tribunal ought to have had regard to the guidance given by the Employment Appeal Tribunal in the Marshalls Clay and Smith cases. Had the Tribunal applied those guidelines properly, when read together with the ECJ decision, the only possible conclusion was that no credit could properly be given for the payments made. The payment had to be a contractual entitlement and the amount referable to holiday pay, or at least sufficient particulars from which that sum could be determined, had to be identified in the contract itself. That was not so here.
24. Mr Hogarth submits that there are five principles that can be gleaned from the cases.

(1) Is this a regulation 16(5) payment at all? Is the payment a contractual payment? If not, there can be no set off.

(2) Is the payment referable to holidays defined in the contract by reference either to the amount itself or some formula from which it can be determined? Again, if not, no set off is permitted.

(3) If there is a unilateral variation of the contract allocating a specified sum, that is not a contractual payment and cannot be set off.

(4) If there is a consensual variation to allocate a specific sum, this can be set off but only if it is a genuine addition to the remuneration paid.

(5) If there is a lawful contractual payment, is it clear and transparent- the onus being on the employer- what sum is attributable to holidays? If not, no set off is allowed.

We would accept that these principles accurately state the law. The issue in this case, however, is the scope and application of principle (2), and in particular when a sum can be said to be "defined" in the contract.

25. Although the Tribunal found that the agreement itself was contractual, in the sense that there was an agreement that part of the £135 was referable to holidays, the method of calculation was never specified in advance of Mr Lyddon commencing work. This was, submits Mr Hogarth, a case falling within category 3 in the classification identified in the Marshalls Clay case. It was a contract where there was no indication or specification of any specific amount. As such, it did not comply with the second principle enunciated above. The subsequent allocation of a figure in the pay slip amounted to a unilateral variation of the contract and therefore was not a contractual payment at all, as the Gridquest case makes clear. It was a payment falling within principle (3) set out above. The situation was identical to two of the contracts which the court had to consider in the course of the hearing in the Marshalls Clay case, namely the contracts in the Setton and Hoy cases. These were identified by the EAT as category 3 cases. Mr Hogarth does, however, accept that the Tribunal was entitled to find that the independent principle of transparency and clarity (principle (5) above) was satisfied here.

Conclusions

26. It is not disputed that there was a contractual arrangement, which provided that the remuneration should include a sum referable to holiday pay. The critical question is whether there was a contractual agreement as to the amount. Mr Hogarth says that there cannot be unless in advance of starting work the employee there is a contract in place which identifies both that the remuneration is attributable to holiday pay, and precisely what that sum is, or at least a formula for calculating it. The former condition was satisfied but not the latter. Had Mr Lyddon been told in terms in advance of starting work the information which was subsequently given with his pay packet, then a set off would have been permitted. But he was not, and that failure was crucial.
27. We do not accept that submission. True it is that there were no written contractual terms, and no discussion in advance of the appellant commencing work specifically identifying how the holiday pay would be calculated or what the amount would be. We also recognise that the Tribunal did not in terms ask itself whether the payment was specified in the contract. However, we think that on their findings the only proper inference is that it was. It is plain that there was a system in place, reflected in the computer programme, for determining the sum referable to holiday pay. That could readily have been explained to Mr Lyddon at the time he started work had he asked for the information.
28. We have no doubt that the assumption between the appellant and Mr Needham would have been, as with so many other unspecified terms, that the amount referable to holidays would be calculated in precisely the same way as applied to other similarly placed workers. Once the contract was being performed, the pay slips identified quite clearly on each occasion bar one (which was an oversight) what that sum was. We do not accept that this can be seen as a variation of the contract, the allocation of the payment being unilaterally determined by the employer. If, say, an employee is told that he will have sick pay if ill, he would expect to receive the going terms even if he is not told what they are. It is fanciful to say that when the employer first pays sick pay that is a variation of the contract involving the unilateral allocation of an appropriate sum. If in this case Mr Lyddon had received less by way of holiday payment than other employees, he would in our view clearly have had a contractual claim for the difference. The company could not have contended that he was simply entitled to what he had unilaterally been given.
29. Nor do we accept that the contract here was on all fours with those in the Setton and Hoy cases. In neither of those cases was there at any stage any identification of how much of the overall remuneration was attributable to holiday pay. There was plainly no term in place from which that sum could be determined. That would clearly fall foul of the principles enunciated by the European Court in the Robinson-Steele case. Here, Mr Lyddon knew that there would be a sum allocated; it was in fact calculated according to an established system; and it became apparent very quickly to Mr Lyddon himself how much that would be.
30. It follows that we do not accept that the Tribunal was in error in failing to follow the guidelines enunciated in Smith. It is important to emphasise that the principles there set out are only guidance. The fundamental question is whether there is a consensual agreement identifying a specific sum properly attributable to periods of holiday. We are satisfied that this requirement was met in this case. Smith sets out the best way of satisfactorily evidencing that an appropriate and transparent agreement has been made. We respectfully agree with those guidelines. It is obviously desirable that the sum or a formula for calculating it, should be identified in writing in advance of the worker starting work. But the case does not purport to lay down an exhaustive set of criteria which have to be satisfied before a tribunal can properly reach the conclusion that there is a clear and transparent contractual term.
31. Mr Hogarth also drew our attention to the fact that Mr Lyddon was an employee and ought to have been given written terms of employment within eight weeks of starting work pursuant to section 1 of the Employment Rights Act 1996. We do not, however, consider that this assists his case. There is an independent remedy for breach of that obligation. Indeed, it seems to us that if anything this fact is consistent with the analysis we have given, in so far as it recognises that in practice not all contractual terms will necessarily be spelt out in advance of an employee commencing work.


32. We see no misdirection of law in the Tribunal's approach; we think that the evidence shows that an agreement was reached, and it is accepted that the criteria of transparency and clarity are met.