Holiday pay - rolled up

What is "rolled-up holiday pay"?

Rolled-up holiday pay (RHP) is when an employer pays an employee an hourly or daily rate which includes an element in respect of holiday pay to reflect the fact that the employee is entitled to four weeks holiday pay in each year.

The employee therefore does not receive pay for the days when he actually takes a holiday, because he has previously received the money. I.e. it has been rolled-up in his ordinary wages.

From the employees point view, if annual leave is not taken, they effectively receive holiday pay twice. Once by means of the element paid throughout the year and the other because they don't take holiday so continue to get paid.

This practice has become common in industries where employees work irregular hours or work on short term contracts where it might be administratively convenient for holiday pay to be paid in equal installments rather than have to work out the sum due on every occasion leave is taken.

RHP declared unlawful

On 16th March 2006, the European Court of Justice (ECJ) ruled that RHP is unlawful, as it contravenes the EC Working Time Directive (the Directive).

The Directive states that every employee is entitled to four weeks paid holiday in each year. The ECJ declared that the Directive means what it says, so that rolling-up holiday pay by spreading it over the year is contrary to the Directive.

In its judgment, the ECJ made some interesting and useful points :

• The actual taking of holidays has an important health and safety aspect. The Directive is essentially a health and safety measure designed to protect workers' well being rather than their bank balances.
• The Directive is to be interpreted as not just precluding an employer treating part of the existing pay as representing holiday pay (i.e. no genuine extra amount involved), but as precluding "the payment for minimum annual leave…from being made in the form of part payments staggered over the corresponding annual period of work and paid together with the remuneration for work done, rather than in the form of a payment in respect of a specific period during which the worker actually takes leave".
• Workers cannot agree to contract out of their rights and therefore what their contracts of employment say is irrelevant.

What about rolled-up holiday payments already made?

The ECJ decided that the Directive allows for rolled-up holiday payments that have already been made by employers to be credited against any holiday entitlement the employees have, provided that the holiday pay element was transparent and comprehensible.

This means that employers do not have to unravel past payments and arrangements.

The burden of proving that the holiday pay element was transparent and comprehensible is on the employer.

It would be helpful if the UK Government could give some clear guidance on "transparent" and "comprehensible" alternatives to RHP, but that may be wishful thinking!

The Department of Trade & Industry (DTI)

Further in its judgment, the ECJ directed the UK Government to take appropriate measures to ensure that practices inconsistent with the Directive are not continued.

To date, the DTI has not taken steps to amend UK law but it has amended its guidance regarding RHP. This can be found at www.dti.gov.uk/employment/employment-legislation/employment-guidance.

What should employers do?

Following the ECJ's judgment, employers should :

• discontinue the practice of rolling-up holiday pay ;
• set-off rolled-up holiday payments already made (as long as they have been made in a transparent and comprehensible manner) against future leave payments made at the correct time ;
• pay holiday pay at the time their employees actually take their holidays ; and
• redraft and renegotiate Contracts involving RHP so that payment for Statutory annual leave is made at the time when the leave is taken.

This bulletin is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.

For further information on this or any related topic please contact Lesley Smith or Carina Sparkes.