A European Court of Justice ruling should bring an end to the thorny issue of 'rolled-up' holiday pay.
Over the past few years, 'rolled-up' holiday pay, where holiday pay is included in workers' hourly rates and they are not paid when they take leave, has been a contentious issue. But the question of whether or not it is legal for employers to roll up holiday pay has now been resolved.
Under the Working Time Regulations 1998, workers are entitled to a minimum of four weeks paid annual leave. For each week of leave entitlement, the employer must pay the worker one week's pay.
Where irregular working patterns occur, employers often choose to pay 'rolled-up' hourly or weekly contractual rates, which include an element of pay that is expressly stated to be an advance on holiday pay. This means that there is no requirement on the employer to pay the worker an additional sum when annual leave is taken.
The regulations guarantee workers a minimum entitlement to four weeks of paid leave, but they make it clear that the minimum period of paid leave "may not be replaced by a payment in lieu, except where the worker's employment is terminated".
The European Court of Justice considered the issue of rolled-up holiday pay in the case of Robinson-Steele v RD Retail Services Ltd and concluded that rolled-up holiday pay is unlawful. However, it concluded that if an employer does roll up extra money in respect of holiday pay it can set this money off against the payments it should make during the specific holiday period. It will be up to the employer to prove that such an arrangement is transparent and comprehensible.
The Department of Trade and Industry has now amended its guidance to make rolled-up holiday pay unlawful, but this will not be binding until the English courts have followed the ECJ decision. In the meantime, employers may choose to continue with their existing practices.
If they decide to continue rolling up holiday pay, employers should ensure that the holiday pay component of a worker's package is an additional payment made in respect of work actually done, and that employment contracts make it clear if any element of the contractual remuneration is an advance on holiday pay.