All workers in the UK have a right to holiday pay; one week’s pay for each week of statutory leave. The amount to which they are entitled is calculated by reference to the hours worked and how they are usually paid.
For fixed hour workers, this is a fairly simple process, but for casual and zero hour contract workers, the calculations get trickier as businesses need to consider the average number of hours worked to determine the amount of holiday pay the worker is owed.
As a result, rolling up workers’ holiday pay into their basic pay used to be fairly standard practice, especially for flexible workers. However, following case law at the European level in 2006, the practice of rolled up holiday pay is now technically unlawful in the UK.
That said, rolled up holiday pay is still used by some businesses, especially in relation to casual or zero-hour contract workers; these workers may even prefer their holiday pay to be rolled up into their basic pay. So, why do some businesses continue to pay their workers rolled up holiday pay, what are the risks of doing so and what can businesses do to minimise these?
What is rolled up holiday pay?
Rolled up holiday pay is a system by which businesses include their workers’ holiday pay in their basic pay, rather than paying them when their holiday is actually taken. It results in a slightly increased hourly rate for the worker and streamlines the administrative process for businesses which do not then have to calculate a worker’s holiday entitlement.
Is rolled up holiday pay allowed?
Following the case of Robinson-Steele v PD Retail Services and other cases [2006] in the European Court of Justice, rolled up holiday pay is not, strictly speaking, permitted; payment for holidays should be made when the actual holidays are taken.
The argument against the use of rolled up holiday pay is that workers are deterred from taking holiday as they are not being paid directly for it. The European Court urged EU member states to take necessary steps to end the practice. Notwithstanding the European Court’s stance, the UK government has not put in place legislation prohibiting the use of rolled up holiday pay, although it does in non-statutory guidance, state that any contract which includes rolled up holiday pay should be renegotiated.
How do you calculate rolled up holiday pay?
Standard practice is to increase a relevant worker’s hourly rate by 12.07%. This is calculated on the basis of a statutory entitlement of 5.6 weeks holiday per year. By way of example:
52 weeks per year minus 5.6 weeks statutory holiday entitlement = 46.4 working weeks
(5.6 weeks statutory holiday entitlement divided by 46.4 working weeks) multiplied by 100 = 12.07%
However, the Employment Appeal Tribunal has cast doubt on whether this method is correct. In a 2018 case (Harpur Trust v Brazel [2019] EWCA Civ 1402), it was ruled that a teacher who only worked during term-time should have received holiday pay calculated on her average pay for the previous 12 weeks. Such a calculation should exclude any weeks during which the worker did not work but include any overtime, bonuses and commission paid during that period.
It is worth bearing in mind that as from 6 April 2020, the average pay for the previous 52 weeks (rather than 12) should be used.
Unfortunately for businesses, there is now some uncertainty as to which method to use when calculating flexible workers’ holiday pay.
Why do business still use rolled up holiday pay?
Businesses employing casual and/or zero-hour contract workers are more inclined to use rolled up holiday pay for ease. Calculating a flexible worker’s holiday leave entitlement and the amount of holiday to which they are entitled can be administratively onerous and factoring in annual leave can cause problems when drawing up rotas. In addition, the need to take overtime and commission into account when calculating holiday pay can be complex when dealing with flexible workers. As such, it is often simpler for businesses to simply pay their workers slightly more in their basic pay. Workers themselves are often content to receive rolled up holiday pay as they are then not forced to take holiday and can earn a higher hourly rate.
The European Court of Justice’s judgment also creates some uncertainty the position of set-off and the unequivocal position has not been considered in court since. The court held that amounts already paid as rolled up holiday pay could be set-off against holidays taken in the future, provided that the holiday pay terms were open, understandable and transparent.
This could be interpreted in several ways:
- Rolled up holiday pay can be used to set off holiday pay for any holiday;
- Rolled up holiday pay can be used to set off holiday pay, provided that the pay has been received prior to the holiday in question. For example, a business’ holiday year runs from January to December and a worker decides to take a week’s holiday in September. Provided that the worker has received sufficient rolled up holiday pay between January and September, it can be set-off against the holiday pay to which the worker is entitled in September; or
- Set-off was only permitted in relation to rolled up holiday pay already paid at the time of the court’s ruling.
- Some businesses interpret the ruling to mean that set-off is possible, provided that workers are fully aware of the holiday pay arrangements.
What are the rules for zero hour contract workers?
As with any rolled up holiday pay, it is technically illegal to use rolled up holiday pay for zero hour contract workers, although many businesses still do so in order to simplify holiday payments.
The standard rate by which to increase a zero hour contract worker’s basic hourly pay to account for holiday pay is 12.07%, although it is now arguable that businesses should instead calculate holiday pay based on the worker’s average pay for the past 12 weeks (52 weeks from 6 April 2020). Any weeks during which the zero hour contract worker was not working should be disregarded. As a result, workers could be entitled to receive full pay for holiday taken after a very quiet period in which they had not worked for some time.
It is important that the basic pay rate and the rolled up holiday pay are clearly differentiated on the worker’s payslip.
What are the risks for employers of using rolled up holiday pay?
As rolled up holiday pay is technically illegal, businesses who use it do face some risks.
- Potential double payment. If a worker successfully argues that they have been deterred from taking their holidays, they may be entitled to ‘just and equitable’ compensation. As a result, the business may have to pay that worker twice for their holiday, firstly in the rolled up holiday pay and secondly as compensation. An alternative to this is that workers may be able to carry their holiday over to the following holiday year; if they then leave the business, they can claim payment in lieu of their holiday on termination of their contract.
- Workers who have irregular hours may not receive the correct amount of holiday pay under the rolled up holiday pay system. They may receive too little or too much depending on the number of hours that they have worked. There is a risk that this could potentially result in a claim against the business for an unlawful deduction of wages.
- If, in the future, confirmation is obtained that set off was only permitted in relation to rolled up holiday pay already paid at the time of the court’s ruling, that is in 2006, businesses which have continued to use rolled up holiday pay could face substantial liability.
- At the very least, a worker could bring a grievance against the business for paying holiday pay incorrectly, which will take up management time.
Ideally, businesses who use rolled up holiday pay should rethink their systems and amend their contracts to provide that workers will receive holiday pay as and when they take their holidays. Software systems can be acquired which simplify the administrative burden of working out a casual or zero hour contract worker’s holiday entitlement and the UK government’s website also includes a calculator to assist with this.
A business which decides to continue using rolled up holiday pay should ensure that:
- The system is very clear and open to workers. For example, the use of rolled up holiday pay should be raised with workers as part of the hiring process and written confirmation received from them that they have chosen to take rolled up holiday pay but understand that they are able, if they so wish in the future, to choose to take paid annual leave. (However, bear in mind that, according to the European Court of Justice, it is not possible for workers to contract out of their holiday pay rights);
- Payslips make clear what element of a worker’s pay is holiday pay and what is basic pay; and
- Under no circumstances, should businesses prevent workers from taking annual leave; ideally, businesses should be proactive in encouraging their flexible staff members to take holiday.
Rolled up holiday pay FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing & Content Agency for the Professional Services Sector.
