Not only are your labour-only subcontractors entitled to holiday pay, but if your arrangements for giving it to them are unclear, you could end up doling out twice
How do you feel about giving your labour–only subcontractors holiday pay?

More importantly, how do you feel about the prospect of paying them twice? Recent developments in the law may give contractors some cause for concern. To compound the problem, trade unions such as UCATT have sponsored and supported claims to employment tribunals for paid leave.

The Working Time Regulations 1998 provide workers with a statutory right to 20 days' paid leave a year. No qualification period is required. The regulations provide for a system of holiday accrual for workers in their first year of service, so that, for each month or part of a month worked, the worker is entitled to one twelfth of their annual leave.

So who is a "worker" for the purposes of the regulations? The definition is broader than that of simply an employee. It also covers self-employed individuals who personally (that is, not as part of a business) provide work or services under a contract for a party – except where that party is a "customer" or "client" of the individual.

In one case, builders working for a contractor signed subcontractors' agreements. The Employment Appeal Tribunal found that as they were obliged to personally perform works or services, and did not do so in the capacity of a business undertaking, they were workers within the definition of the regulations.

The reality of what happens on site is therefore vital when a contractor is trying to resist the argument that an individual subcontractor is a worker.

The Employment Appeal Tribunal has also confirmed that when the engagement ends, unless there is a written agreement authorising deduction of money for holiday taken but not yet accrued, such a deduction will be unlawful and indefensible. Workers are entitled to claim for the unlawful deduction of wages. Including a provision in a subcontract agreement allowing for deductions suggests that the subcontractor is a worker, and this is therefore to be discouraged.

One way of dealing with holiday pay is to incorporate an amount representing holiday pay into workers' pay – this is known as "rolling up", and is used to reduce the cost and inconvenience involved in calculating average pay for the purposes of holiday pay at the time when holiday is taken. But does it work? Unfortunately there is conflicting case law between the English Court of Appeal and Scottish equivalent, the Court of Session, with the Employment Appeal Tribunal (a lower court) seeking to clarify the issue.

In Gridquest Ltd vs Blackburn, the Court of Appeal suggested that if an employer and employee (or worker) agreed that pay included an amount for something else such as holiday pay, such arrangements were legitimate.

By contrast, in MPB Structure Ltd vs Monroe, the Scottish Court of Session decided that rolling up holiday pay was a breach of the regulations, as it amounted to an attempt to contract out of these regulations. The worker in that case remained entitled to holiday pay, despite having received an enhanced hourly rate deemed to include holiday pay – a double recovery.

Scottish court decisions are generally not binding in England and Wales – so said the Employment Appeal Tribunal in Marshalls Clay vs Caulfield. Here the tribunal identified five types of rolling-up provisions. In circumstances where contracts provided for a basic wage or rate topped up by a specific sum or percentage in respect of holiday pay, or where holiday pay is allocated to and paid during or immediately before or after specific periods of holiday, those arrangements are effective and are not in breach of the regulations. Agreements excluding liability for holiday pay, making no reference to holiday or seeking to roll up holiday pay into pay rates without identifying the amount are void.

Contractors need to review the status of those on site to see whether they fall into the "worker" category. In addition, if you are rolling up holiday pay, take care to clarify this in a written agreement. If appropriate, pay it when holiday is taken to reduce the risk of tribunal claims – and the danger of paying out twice.