Clarke v Frank Staddon Ltd.

The Court of Appeal considered whether contractual arrangements that incorporate "rolled-up" holiday pay into ordinary pay violate the right to paid annual leave under Article 7 of Council Directive 93/104/EC (the Working Time Directive) as implemented by the Working Time Regulations. The court concluded that rolled-up holiday pay is not automatically incompatible with Article 7 or the Regulations. The court distinguished between legitimate contractual or collective arrangements that set conditions for how leave and pay are enjoyed and contractual terms that erect substantive obstacles denying the effective enjoyment of paid annual leave. Where there is an express, agreed allocation of a specific sum or percentage to holiday pay (a Category 4 arrangement), that contractual remuneration can count towards the statutory entitlement and will not of itself contravene regulation 16(1) or regulation 35(1). The court rejected the submission that Article 7 requires payment to be made at the exact time the leave is taken and emphasised that factual context, bargaining (including collective agreements) and practical effect determine legality. The court agreed that one appellant’s case (Clarke) required factual clarification and remitted it to the Employment Tribunal for further findings, while the employees in the Caulfield group did not establish that their arrangements denied the Article 7 right.

This case comprises two consolidated appeals from decisions of the Employment Appeal Tribunal (EAT) concerning the legality of "rolled-up" holiday pay under the Working Time Directive 93/104/EC and the Working Time Regulations.

Background and parties:

• Caulfield appeals: employees of Marshalls Clay Products Ltd employed on a four-days-on/four-days-off rota under a collective agreement which stated holiday pay was incorporated into the hourly rate (13.36%). The Employment Tribunal held the rolled-up scheme contravened the Regulations; the EAT allowed the employer’s appeal. The employees appealed to the Court of Appeal.
• Clarke appeal: a worker engaged under a CIS contract with Frank Staddon Ltd had a daily rate described as including holiday pay. The Employment Tribunal held for the employer; the EAT remitted factual questions about whether a specific proportion had been attributed to holiday pay and whether a break in continuity occurred. Clarke appealed to the Court of Appeal.

Relief sought and issues:

• The workers sought declarations and remedies for breach of their rights to paid annual leave under Article 7 of the Directive as implemented by the Working Time Regulations. The central legal questions were (i) whether rolled-up holiday pay arrangements are compatible with Article 7 and the Regulations and (ii) whether contractual terms that do not earmark holiday pay or that pay it in ordinary pay packets are tantamount to payment in lieu or otherwise negate the right.

Court’s reasoning:

• The court surveyed the Directive (in particular Article 7) and the Regulations (notably regulations 13, 15, 16 and 35) and considered domestic precedents including MPB Structures Ltd v Munro, Gridquest Ltd, and the ECJ decision in BECTU.
• The Court stressed that Article 7 guarantees a single entitlement to paid annual leave but does not, by its wording, prescribe the precise timing of payment. The Regulations must be read in light of the Directive and cannot impose requirements that exceed it.
• The court rejected a principle that payment must be made at the exact time leave is taken. Instead it drew the distinction between lawful contractual frameworks (including collective agreements) that reasonably permit enjoyment of the right and contractual provisions that create substantive barriers or effectively deny the right. Where there is an express agreed allocation of a specific sum or percentage for holiday pay (Category 4), that contractual remuneration can discharge the employer’s liability under regulation 16(1).
• Applying that reasoning, the Court held that the Caulfield arrangements, negotiated with the union and specifying the holiday element, were not incompatible with the Directive or Regulations. In Clarke the court ordered remittal to the Employment Tribunal to resolve whether a specific allocation to holiday pay existed during the earlier period and whether continuity was broken.
• The court declined to treat the Inner House decision in Munro as binding precedent in England and Wales and explained the limits of cross-jurisdictional precedent, while noting the legal question was of sufficient importance to warrant reference to the European Court of Justice; the Court indicated it was minded to make a reference to the ECJ and to seek expedition and joinder with a reference already made by another Employment Tribunal.

Procedural posture: both appeals came from the EAT sitting on appeals from the Employment Tribunal; the EAT had given its composite judgment on 24 July 2003. The Court of Appeal heard the consolidated appeals and issued the present judgment on 28 April 2004.

The Court of Appeal held that contractual "rolled-up" holiday pay arrangements are not, as a matter of law, necessarily incompatible with Article 7 of Directive 93/104/EC or with the Working Time Regulations. The proper test is whether the arrangement in practice denies or substantially obstructs the effective enjoyment of the right to paid annual leave; an express contractual or collectively agreed allocation of a specific sum or percentage for holiday pay can count towards the statutory entitlement. The court rejected the submission that payment must be made at the precise time leave is taken. Applying that approach the court concluded that the Caulfield claim did not establish a breach, and that Clarke’s case should be remitted to the Employment Tribunal for factual clarification on allocation and continuity. The court also indicated it was minded to refer the substantive question to the European Court of Justice for resolution and to seek expedition and possible joinder with an existing reference.

Appeals to the Court of Appeal from the Employment Appeal Tribunal (composite judgment delivered by the President Burton J on 24 July 2003). The Court of Appeal heard consolidated appeals arising from Employment Tribunal determinations and the EAT’s decision and delivered judgment on 28 April 2004. The EAT had heard argument on 10 June 2003 and reserved judgment pending related cases listed for 25 June 2003.