03rd January 2018

Can an Employer Pay Rolled-Up Holiday Pay?

Background

Prior to the implementation of the Working Time Directive 1998 and its provisions for paid annual leave, it was common for workers, especially casual and part-time workers, to not be given paid holidays.

The Working Time Regulations 1998 implemented the provisions of the Working Time Directive, thus providing workers with the right to paid holidays. Many employers attempted to circumvent the legislation by topping up workers’ hourly rates with a holiday pay allowance, or in some cases, claiming that their basic rate of pay was already inclusive of holiday pay entitlement.

However, it was argued that such measures went against the spirit of the law. A worker in a low paid role could be placed in a financially precarious situation by the loss of a week’s wage, and rolling up holiday pay would, therefore, be likely to deter workers from actually using their holiday entitlement.

The issue was pursued through the English courts, before finally being referred to the European Court of Justice in the case of Robinson-Steele v PD Retail Services and other cases [2006].

Advocate General’s Opinion

The Advocate General suggested that rolled-up holiday pay was not in itself unlawful. However, recognising the pressure on workers, especially low paid workers, to forgo taking their leave entitlement by the necessity to earn a regular income, the Advocate General went on to propose that such an arrangement would only be lawful if there was some other mechanism in place to ensure the worker actually took their minimum annual leave entitlement. Furthermore, any arrangements to include holiday pay with basic rate should be transparent, and it should be clearly demonstrated that an additional payment was being made above the basic pay rate; apportioning an amount of existing pay would not be acceptable.

ECJ Decision

However, an Advocate’s opinion is not binding on the court, and the ECJ instead held that rolled-up holiday pay was contrary to the Working Time Directive and, as such, unlawful, and that Member States should take steps to end practices incompatible with the directive.

However, the ECJ also provided that sums already paid under a transparent and clear rolled-up holiday pay arrangement could be set off against any claim for unpaid holiday pay.

UK Government Response

Arguably, the decision handed down by the ECJ required a change to the practice of rolling up holiday pay. However, rather than recognising the decision through a statutory amendment to the Working Time Regulations, the UK government instead chose to address the issue through the publishing of non-statutory guidance, which advised employers to renegotiate contracts that included rolled-up holiday pay. The guidance currently states: "Holiday pay should be paid for the time when annual leave is taken. An employer cannot include an amount for holiday pay in the hourly rate (known as 'rolled-up holiday pay'). If a current contract still includes rolled-up pay, it needs to be re-negotiated."

Current Situation

Therefore, whilst rolled-up holiday pay is technically considered unlawful, as long as the apportionment is clearly broken down on payslips, and there are no barriers in place which prevent employees taking holiday, any successful claim for holiday pay should be offset by sums already paid under a rolled-up holiday pay arrangement.

However, employers should take care when using such a system.  If any worker is able to successfully show that they were prevented from taking holiday, then the employer may not be able to rely upon the set-off and may find themselves in a position of having to pay out twice. As such, it is advisable to obtain written confirmation from employees that they are electing to receive rolled-up holiday pay and that they acknowledge they can, as an alternative, take paid leave if it is booked in accordance with the employer’s holiday booking procedure.

It is clear that, in certain circumstances, there are huge benefits to topping up a worker’s basic rate to incorporate holiday pay rather than paying them during periods of leave. Casual workers, contracted to only a few hours per week, may not necessarily wish to take paid leave and prefer instead to receive a higher rate of pay per hour, which includes an element of rolled-up holiday pay. This system can also be beneficial to businesses as they do not need to deal with holiday requests or factor casual workers’ holidays into their rotas.

On the other hand, rolled-up holiday pay is unlikely to ever be appropriate for full-time employees working regular hours, as employers need to ensure that employees are able to take time off work.

Furthermore, following several recent test cases in the Employment Appeals Tribunal, holiday pay must now be calculated to include regular overtime, shift allowances, commission, and other similar payments, so that employees and workers continue to receive their normal remuneration rate during any period of holiday. The general premise behind this is that the employees and workers should not be at a financial disadvantage when they take holidays. It would be difficult for employers to factor such payments into a rolled-up holiday pay system.

If an employer does choose to pay rolled-up holiday pay they must ensure that the system implemented is transparent, and that, notwithstanding the fact that the employer is paying rolled-up holiday pay, employees are provided with the opportunity to use their holiday entitlement instead if they so wish, in order to mitigate the risk posed by the use of a rolled-up holiday pay arrangement.

 

*All information is correct at the time of publishing

Katy Parkinson

Napthens LLP – Employment Law Specialist

Katy is one of our Employment Law Specialists from Napthens Solicitors. Read more

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