Rolled-up holiday pay is the practice of paying holiday pay in the normal pay to a worker throughout their employment and not paying any holiday pay while the worker is on actual holiday. Since the introduction of Working Time Regulations (WTR) in 1998, this practice, for the most part, has died out. And is now technically unlawful.
For employees who receive 5.6 weeks annual leave each year, an employer would generally calculate rolled-up holiday pay as an additional 12.07% on top of the hourly wage as follows:
52 – 5.6 = 46.4 working weeks per annum.
5.6 (number of weeks holiday each year) is 12.07% of 46.4.
The practice is most common where an employer requires its workers to work during term time and take their holiday during term time breaks or employs casual workers.
European Court of Justice Decision
Following a number of cases, the decision was made that the practice is unlawful. One of the deciding factors was that rolled-up holiday pay defeated the condition set out in Working Time Directive (WTD) which provided for “paid-for” holiday leave.
Final decision was made in the case of Robinson-Steele v PD Retail Services when it went to European Court of Justice. The Advocate General was of the view that the practice could be lawful if it was done in a completely transparent way, the holiday pay is easy to identify and is recorded on pay statements as separate to basic pay and provisions must be in place to ensure workers actually do take annual leave. However the ECJ declined to follow the Advocate General’s opinion and held that the practice is prohibited by WTD as it does not provide pay during the actual leave period.
The decision was that the rolled-up holiday pay is, technically, unlawful but any sums already paid to the workers under a transparent rolled-up holiday pay practice could be set off against any claim for unpaid holiday pay (known as “set off”). ECJ has failed to advise on the time period that the “set off” can apply to, leaving employers none the wiser in regards to the liability.
Following the ruling a number of amendments were made to the statutory guidance about holiday leave. The most recent is on the Government site and states:
“Holiday pay should be paid for the time when annual leave is taken. An employer cannot include an amount for holiday pay in the hourly rate (known as rolled up holiday pay). If a current contract still includes rolled-up pay, it needs to be re-negotiated”.
The risks of continuing with rolled-up holiday pay practice
The Robinson-Steele case identified that rolled-up holiday pay created a deterrent for workers to take annual leave through not receiving any pay during the annual leave period. Additionally, if a worker successfully argues that they were prevented from taking annual leave he/she is entitled to claim and receive “just and equitable” compensation for the breach of WTR. The set off rule mentioned in the Robinson-Steele case would not apply and the employer may find itself effectively paying employee twice for the annual leave.
Rolled-up holiday pay does not take into account irregular working hours thus the employee may not be receiving the correct amount of holiday pay. Particular problems arise when irregular hours are worked or there are some weeks of the year where the worker does not carry out any work. This is because the 12.07% holiday pay calculation is not compatible with the WTR requirements to calculate annual leave for irregular working pattern workers/ casual workers on their average pay over the52 weeks preceding the holiday. The ruling in illustrated issues with calculating holiday pay in this manner.
Rolled-up Holiday Pay – Guidance for Employers
Following the court decisions, employers are still left with the problem of how to deal with the annual leave entitlement for casual or term-time workers. It would seem, the only practical solution is to invest in a computer software (usually part of employer’s payroll system) that would calculate annual leave at any given time during employment and upon termination.
Failing that, the employer can adopt a 52 week average method of calculating annual leave, but the employer must be stringent about this and the holiday leave entitlement must be calculated on an ongoing basis, taking into account employee’s pay during that 52 week period.