"Rolling-up" holiday pay has been ruled illegal by the European Court of Justice (ECJ).
The practice, which involves paying an increased hourly rate to employees the rest of the year rather than paying annual leave when the holidays are taken, is used extensively by many hotels and leisure businesses.
Even if the practice is contractually agreed, the ECJ has ruled that it breaches the Working Time Directive because payment for holidays is not made at the time the holiday is taken. This potentially discourages workers from taking their four weeks' paid holiday entitlement.
Rob Eldridge, partner and head of employment, pensions and incentives at Berwin Leighton Paisner, said: "Thousands of employers may now have to rework their salary arrangements. The ruling has a particularly big impact on those sectors that rely heavily on short-term contracts and work shifts, like hotels and leisure."