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Rolled-up holiday pay

24 August 2006

The problem
I own an events catering company and take on casual staff for three to six months at a time. I do not want these workers to take holidays so I make payments for holiday pay by "rolling it up" alongside their normal hourly rate of pay. Is this still legal?

The Law
Rolled-up holiday pay (RHP) is the practice of paying a percentage allowance for a worker's annual holiday entitlement alongside their normal rate of pay. This means that the employer makes no additional payments when their workers actually take holidays.

In a recent European Court of Justice (ECJ) case (Robinson-Steele v RD Retail Services Ltd), it was ruled that it is unlawful to make payments for the statutory 20-day annual holiday entitlement by "rolling it up" into the employee's normal remuneration. The practice was held to be a breach of the spirit of the EU Working Time Directive, the European source for our own working time regulations.

Before the ECJ decision, there was Scottish authority which ruled that RHP payments were unlawful. However, English case law on the matter had provisionally established that paying RHP was legal, provided that:

  • The parties' agreement to RHP was reflected in the employment contract.
  • The RHP was a genuine payment for holiday entitlement to compensate the worker for when holiday was actually taken.
  • The additional element for holiday pay was included separately to the basic rate of pay on the payslip and was, therefore, transparent.
  • Holiday records were kept and steps were taken by employers to encourage workers to take their holidays.

Expert advice From now on, the practice should be phased out, as the ECJ decision makes rolling up holiday pay unlawful.

Businesses can still continue to pay RHP, provided their present arrangements comply with the conditions set out above, because the ECJ did not go as far as to make its ruling retrospective. This means that employers will not face claims for backdated holiday pay from workers.

However, it seems that the Government will make the practice unlawful by amending its working time regulations in line with the ECJ decision in due course. Businesses should not wait until this happens; the Department of Trade and Industry has already advised employers to discontinue the practice.

Check list

  • If you roll up holiday pay, discontinue the practice before the start of your next holiday year.
  • Communicate the change to all workers.
  • Encourage workers currently paid RHP to take some holiday during employment (note that the ECJ was persuaded by the argument that RHP discourages workers from taking holiday).
  • As an employer, remember that you are entitled to dictate when workers take holiday so that you can minimise disruption to business.

Beware! Doing nothing about your current RHP practices will mean you fall foul of the law.

It is an automatically unfair dismissal to dismiss any employee for asserting his right to take holiday under the working time regulations.

Workers and employees can bring claims in an employment tribunal for non-payment or incorrect payment of holiday pay under the working time regulations (after pursuing a statutory grievance). They must do so within three months of the date on which the holiday payment should have been made (in RHP cases, the first day holiday is taken).

If the employment tribunal rules in favour of a worker, the employer will be liable to pay the worker an amount due for holiday. If an RHP payment has already been made, and a tribunal rules that this was unlawful, the employer will have to pay an additional sum in compensation for the worker's holiday entitlement.

In addition, the tribunal can make an award of compensation if it deems that the non-taking of holiday represents a serious breach of health and safety rules. There is no upper limit to the compensation a tribunal can award.

ContactsAnne Edwards
Employment solicitor
Bracher Rawlins
020 7404 9400

Acas
www.acas.org.uk

Department of Trade and Industry
www.dti.org.uk

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