In this article...

• What is rolled-up holiday pay?
• What did the ECJ decide?
• What does the new DTI guidance say?
• What does this mean for me?

The Department of Trade and Industry has recently amended its guidance on the Working Time Regulations to make it clear that the practice of paying rolled-up holiday pay is unlawful and must cease. Claire Cooke considers what this means for employers.

What is rolled-up holiday pay?

Rolled-up holiday pay is an arrangement whereby employers include an element in respect of holiday pay in the worker’s hourly or weekly rate to reflect the statutory entitlement to four weeks’ annual leave under the Working Time Regulations 1998. No additional payments are then made when the worker actually takes leave.

This can have practical advantages, especially when wages fluctuate or the worker is engaged in shift-work. In such cases, it is administratively convenient to pay holiday pay in equal instalments, rather than having to work out the payment that is due on each occasion that the worker takes leave. However, there has been much uncertainty as to whether the practice is lawful. The European Court of Justice (ECJ) considered the issue last year in Robinson-Steele v RD Retail Services Ltd.

What did the ECJ decide?

The ECJ ruled that the practice of rolling up holiday pay was unlawful. In its view, workers taking statutory annual leave must be placed in the same financial position as they would be in if they were carrying out work. Thus, payment must continue during the statutory leave period. The ECJ confirmed that rolled-up holiday pay arrangements may lead to workers receiving a payment in lieu of their annual leave entitlement, which is contrary to the EC Working Time Directive.

The ECJ went on to consider whether employers should be given credit and allowed to set off payments already made under a rolled-up holiday system against a worker’s entitlement to payment when he or she actually takes leave. The ECJ decided that such payments may be set off against future leave payments if made “transparently and comprehensively”.

In response to the ECJ’s decision, the DTI changed its guidance on the Working Time Regulations to state that, while rolled-up holiday pay was considered unlawful and employers should renegotiate contracts for existing workers as soon as possible, “where an employer has already given rolled-up holiday pay in relation to work undertaken, and the payments have been made in a transparent and comprehensible manner, they can be set off against any future leave payments made at the proper time”.

What does the new DTI guidance say?

Almost a year to the day after the ECJ’s decision, the DTI has amended its guidance again. The new version confirms that rolled-up holiday pay is unlawful and states that “employers are now required to ensure that payment for statutory annual leave is made at the time when leave is taken”. There is no longer any reference to set-off.

It was unclear from the ECJ’s decision and the previous version of the guidance for how long the possibility of set-off would apply. However, the DTI appears to be taking the view that employers have now had sufficient time to renegotiate rolled-up holiday arrangements and the period of grace has come to an end.

What does this mean for me?

		Employers who have not already done so should renegotiate contracts involving rolled-up holiday pay as soon as possible so that statutory holiday payments are made at the time when the holiday is taken.
		Workers are entitled to be paid at the rate of a week’s pay in respect of each week of statutory annual leave.
		Workers with normal working hours whose pay varies with the amount of work done are entitled to holiday pay based on their average pay during those normal working hours in the previous 12 working weeks, including any bonuses and commission.
		For workers with no normal working hours, a week's pay is calculated as an average of all the sums earned in the previous 12 working weeks. This would include any overtime payments and commission.
		Annual holiday entitlement and accrual rate are potentially problematic when it comes to casual or temporary workers where it is not known in advance how long they will be employed. Employers could deal with this problem by permitting temporary workers to accrue holiday at a specified notional rate each month and by adjusting final pay on termination of employment according to the length of the period worked and whether the individual has used his or her accrued holiday (bearing in mind that payments in lieu of unused leave are permissible, as an exception to the general rule, where the contract terminates during the course of the leave year).