Understanding rolled-up holiday pay

Please note, legislation has been updated in regards to holiday calculations since this article was written, effective for holiday years starting on or after 1 April 2024. If you’re a Moorepay client, please contact us if you need guidance. Otherwise, please see this article on the changes for more information. 

Roll up, roll up, for an article explaining rolled-up holiday pay: what it is, when it’s used, and when you should avoid it. 

Rolled-up holiday pay is one method for paying employees for their statutory holiday entitlement, where payment is spread the employee’s holiday pay over the year. Though commonly used, rolled-up holiday pay has received a couple of legal changes over the last few years which means employers need to be very cautious when applying it to their own payroll. Here are the facts.

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, usually by adding an amount on top of the employee’s hourly rate. 

Is rolled-up holiday pay lawful?

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, as it may otherwise act as an unlawful disincentive to take holiday. It can also result in an underpayment of a worker’s statutory holiday entitlement. 

However, with new changes to holiday calculations coming into effect for annual leave years starting after April 1 2024, rolled-up holiday pay is being made legal again – in certain circumstances.

So for leave years starting on or after 1 April 2024, employers may choose to use rolled-up holiday pay for irregular hours workers and part-year workers only.

But should you use rolled-up holiday pay?

Although employers may currently use rolled-up holiday pay for irregular and part-year workers, at Moorepay we advise caution if you’re considering using this method. If this method was previously found to be unlawful in the court of law, there is always potential that, with changing regulations, the law may swing the other way and you will have to change your holiday calculations once more.

It is of course still against the rules to create reduce incentive for employees taking their statutory annual leave. Therefore any changes to holiday pay calculations must be carefully considered to ensure you’re not accidentally creating a disincentive.

Lastly, if you do decide to resurrect rolled-up holiday pay, please note that as an employer, you must notify any employees affected that you’re planning to use it. Introducing this might involve changing your employment contracts, which has its own set of procedures you must follow.

When is rolled-up holiday pay typically 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 part-year 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. 

The alternatives

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.

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. 

In conclusion 

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 against the law unless it’s being used specifically for irregular or part-year workers, for annual leave year starting after the 31st March.

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.