This month the Department of Trade and Industry (DTI) called time on ‘rolled-up’ holiday pay – the practice of including an element in respect of holiday in workers’ hourly rates rather than paying them at the time leave is taken.

The DTI has amended its guidance on The Working Time Regulations to confirm that it is unlawful to ‘roll-up’ statutory holiday pay and “employers are now required to ensure that payment for statutory annual leave is made at the time when leave is taken”. This move comes a year on from the European Court of Justice ruling that ‘rolling-up’ is contrary to the EU Working Time Directive.

What is rolled-up holiday pay?

Under the Working Time Directive all workers in the EU are entitled to a minimum of four weeks’ paid leave each year. Employers cannot pay workers in lieu of their entitlement unless employment is ending.

‘Rolling-up’ holiday pay is most commonly used in relation to temporary, seasonal or shift workers as it can be difficult to calculate their entitlement at a specific point in time. Payment for leave is made throughout the year as an increment to ordinary pay rather than at the time it is taken. As well as simplifying administration for the employer at the time holiday is taken, this system of payment, in theory, should enable the employee to save and plan for holidays in advance. However, in practice, it means that taking holidays involves not getting paid - so there is a disincentive for workers to take the leave to which they are entitled (which is designed to protect their health and safety). Workers who fail to take their annual leave in effect end up receiving an allowance in lieu of taking it – which is unlawful under the Working Time Directive.

Does the amendment apply to all industries?

The amended rules apply to all industries, including those where ‘rolled-up’ pay is common – for example, in the entertainment, construction and manufacturing sectors where staff are employed on short-term, temporary or casual contracts or work irregular shifts.

So what does this mean for employers?

In practical terms, the revised DTI guidance means that the practice of ‘rolling-up’ holiday pay can no-longer be justified.

To avoid the risk of potentially costly claims, employers should alter their arrangements to pay workers at the time they actually take their holidays: 

  • Employment contracts should be reviewed to establish which workers receive ‘rolled up holiday pay’. 
  • Employers should advise such workers that it is now unlawful to pay ‘rolled-up’ holiday pay and update their contracts to reflect their revised standard hourly rates and the new basis of calculating holiday pay; 
  • Systems will need to be put into place to ensure the correct calculation of workers’ holiday pay. The Working Time Directive requires holiday pay for such workers to be calculated based on the proceeding 12-week average.

The abandonment of ‘rolled-up’ holiday pay will undoubtedly add to the administrative burden of employers, particularly for small businesses, due to the complicated calculations of individuals’ holiday pay. The other challenge for employers will be to make the transition in a way that ensures employees do not feel that they are being short changed by a system designed to protect their best interests.