Rolled-up holiday pay – offsetting allowed
The EAT in Lyddon v Engleford Brickwork Limited has held that an employer was entitled to offset rolled-up holiday pay (RHP) against a worker's entitlement to annual leave under the Working Time Regulations 1998 (WTR).
Under the WTR workers are currently entitled to 4.8 weeks' annual leave in each leave year. A worker is entitled to be paid during any period of WTR annual leave at a rate of a week's pay for each week of leave.
Following the introduction of the WTR, some employers "rolled up" holiday pay by paying their workforce only during the weeks they worked but at a rate which included pay in respect of annual leave.
The ECJ held in Robinson-Steele v PD Retail Services that RHP is unlawful unless certain conditions apply. Although the WTR have not been amended to reflect this decision, the DBERR guidance on the WTR states that:
"RHP is considered unlawful and employers should renegotiate contracts involving RHP for existing employees/workers as soon as possible so that payment for statutory annual leave is made at the time when the leave is taken".
In the Lyddon case, the EAT had to decide whether a tribunal had correctly held that an employer had been entitled to set off RHP against sums claimed by a former employee.
Mr Lyddon had been told he would be paid at the rate of £135 a day and that would include holiday pay. His weekly pay packet set out his basic wage including rolled-up holiday pay. He took 2 weeks' leave during which he received no pay and he never queried how his holiday pay was calculated.
When his employment ended he took action claiming holiday pay in respect of the statutory annual leave that he had accrued but not taken.
The Tribunal held that the key question was whether payment of RHP had been implemented "transparently and comprehensively" and that in this case it had been.
The EAT held that there was a consensual agreement identifying a specific sum properly attributable to periods of holiday, applying the principles from Robinson-Steele rather than the principles set out in the DBERR guidance.
Impact on employers
The EAT appears to have decided that if there is a consensual agreement identifying a specific sum properly attributable to periods of holiday then this is allowed.
Thus it would seem as long as employees are aware that this is how their holiday pay is paid and do not take issue with it, employers can continue to pay their employees and workers holiday pay in this way.
So, for the time being, RHP can be lawful in certain circumstances despite what DBERR says in its guidance.