The background

Rolled-up holiday pay is an arrangement whereby employers include an element in respect of holiday pay in a worker’s hourly or weekly rate to reflect the statutory entitlement to 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 individual works irregular hours. 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, in Robinson-Steele v RD Retail Services Ltd the European Court of Justice (ECJ) held that the practice of rolling up holiday pay was unlawful. The ECJ went on to state that any rolled-up holiday payments already made by an employer, provided they were made “transparently and comprehensibly”, could nevertheless be set off against payments due for a specific period of leave. 

In the recent case of Lyddon v Englefield Brickwork Ltd the issue was whether an employer had been entitled to offset rolled-up holiday payments against statutory holiday pay claimed by a former employee.

The facts

Mr Lyddon worked for Englefield Brickwork Ltd for a period of 17 weeks. When he started work he was told that his daily rate would be £135 and that this would include holiday pay. The company gave him no details as to the rate of holiday pay or how it was to be calculated, nor did it provide a written contract or statement of employment particulars.

Mr Lyddon’s weekly pay packet showed the amount of his basic wage, holiday pay, deductions for tax and the net amount payable. At no point did he query the method of calculation of his holiday pay. During the period of his employment, he took two weeks’ leave for which he received no extra payment. After his employment had terminated, he brought a claim for holiday pay under the Working Time Regulations 1998.

The tribunal’s decision

The employment tribunal found that, even though the rate of holiday pay and the exact method of calculation were not expressly stated, the payments made to Mr Lyddon were transparent and comprehensible because his weekly pay packet identified a specific sum in respect of holidays. The tribunal noted that Mr Lyddon had accepted payment on that basis without challenge and had not queried the absence of any extra payment when he took leave.

It followed that, although the ECJ in Robinson-Steele had held that rolled-up holiday pay was unlawful, the employer was entitled to offset the amounts that had been paid in that way against Mr Lyddon’s statutory entitlement. The tribunal accordingly dismissed the claim.

The EAT’s decision

Before the EAT, it was not disputed that there was a contractual arrangement whereby Mr Lyddon’s remuneration would include a sum in respect of holiday pay. The critical question was whether there was a contractual agreement as to the amount.

Mr Lyddon argued that no credit could be given for the payments made because his employer had failed to put in place, before he started work, a contract which identified precisely what sum was attributable to holiday pay, or at least a formula for calculating it. It was not enough for the company unilaterally to allocate a figure in respect of holidays in his payslip.

The EAT disagreed. Mr Lyddon knew when he started work that there would be a sum allocated in respect of holiday pay; that sum was in fact calculated according to an established system; and it became apparent to Mr Lyddon very quickly how much his holiday pay would be because his payslips clearly identified the relevant figure.

While it was desirable that the sum or formula in respect of holiday pay should be identified in writing in advance of the worker starting work, the evidence showed that an agreement had been reached and the criteria of transparency and clarity were met.

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What does it mean for me?

This is an unusual case which should be treated with caution. Although the EAT declined to overturn the tribunal’s decision, a verbal agreement which fails to identify the amount payable in respect of rolled-up holiday pay will not, without more, satisfy the conditions for set-off identified in Robinson-Steele.

In any event, the EAT’s judgment fails to acknowledge that set-off appears to have been intended to apply only for a limited period. The DBERR (formerly the DTI) has changed its guidance on the Working Time Regulations several times since the Robinson-Steele judgment. The current 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 the leave is taken”.

The rationale for this change appears to be that employers have had sufficient time to phase out rolled-up holiday arrangements and that the transitional period during which set-off was permissible has come to an end. It follows that employers who have not already done so should renegotiate contracts involving rolled-up holiday pay to eliminate this practice.