Understanding rolled-up holiday pay
Roll up, roll up, for an article explaining rolled-up holiday pay: what it is, when it’s used, and why you should avoid it.
Holiday entitlement and pay is statutory right for almost all workers, including agency workers and workers on irregular or zero-hour contracts, at a minimum of 5.6 weeks a year. Rolled-up holiday pay is one method for paying people for the time they take as annual leave – you might even be using it already! However it’s actually unlawful in the UK and employers should avoid it with a barge poll.
In this article, we will explore what rolled-up holiday pay is, when it is used, how to calculate it, and why you can’t use it anymore.
What is rolled-up holiday pay?
Rolled-up holiday pay is a method of compensating employees for their holiday entitlement by including holiday pay within their regular hourly rate or salary. Instead of paying employees separately for time taken off as holiday, the holiday pay is rolled up and distributed evenly throughout the year or pay period.
When is rolled-up holiday pay used?
Rolled-up holiday pay is most commonly used in industries where it is challenging to schedule regular time off or where the nature of the work makes it difficult to take paid leave. Examples include sectors such as hospitality, seasonal work, or temporary employment where employees may have fluctuating work hours or irregular patterns. For example, it may be used for a café assistant on a zero-hours contract, and will appear in their wage at the end of every month worked.
However, it’s important to note that the use of rolled-up holiday pay requires compliance with legal regulations.
Why rolled-up holiday pay is unlawful
After a decision in the Court of Justice of the European Union (CJEU) in 2006, rolled-up holiday pay was judged to be unlawful as workers are legally entitled to take paid time away from work – whilst receiving their normal rate of pay on holiday.
The decision is to ensure workers take the annual leave they’re entitled to and be paid when they take it. It’s not acceptable for an employer to add an amount on top of a worker’s hourly rate to take account of holiday pay as it may act as an unlawful disincentive to take holiday.
It can also result in an underpayment of a worker’s statutory holiday entitlement.
If the worker is on a permanent contract, the holiday entitlement and pay can be worked out like full-time or part-time workers – where they receive a normal rate of pay for time they take off when they take it off. You can find out more in this article. Holiday entitlement for different employment types | Moorepay
The alternative to calculating holiday pay for workers on short or temporary contracts is by using the accrued method. This is where the worker accrues holiday entitlement from day 1 of employment, based on the proportion of the year they’ve worked for the company. If they’ve not taken all their accrued leave by the end of their contract, they should be paid in lieu for any holiday not taken.
Holiday pay for the leave accrued should be calculated using an average of the weeks they were paid at normal rate.
Rolled-up holiday pay is a historically alternative approach to compensating employees for annual leave, integrating holiday pay into their regular wages or salary that many employers still use to pay their employees.
However, it’s crucial for employers to avoid this calculation, as it reduces the incentive for workers to take their annual leave, and is therefore against the law.
Any employer who still uses this calculation should seek professional advice as soon as possible, and consider investing in Payroll Software that will support you and the business in the calculations required to be legally compliant.