Rolled-up holiday pay

When the right to paid holidays was introduced, many employers dealt with it by simply telling their workers that their hourly rate included an additional sum that was equivalent to holiday pay. Their holiday pay was therefore “rolled-up” into the basic hourly rate. The worker was then expected to save a proportion of the weekly wage to cover the weeks that they were on holiday. However, some employers simply said that their workers’ existing pay already included this rolled-up element, so that their workers received no extra holiday and no additional pay either.

In 2006, the European Court of Justice clarified the law (Robinson-Steele v R D Services Ltd C-131/04 and C-257/04 [2006] IRLR 386). The Court ruled that it is unlawful to pay holiday pay as part of the hourly rate of pay. It said that the practice of rolled-up holiday pay does not comply with the Working Time Directive, which requires that workers are paid for their holiday at the time that they take it.

However, confusingly, these cases also confirm that as long as a worker (typically an agency worker) is told clearly, fully and transparently which part of any pay packet is intended to represent holiday pay, the employer will be allowed to set off any sums paid as holiday pay against the worker’s claim for holiday pay. In other words, where the employer has made clearly identifiable payments on account of holiday pay, a tribunal is likely to conclude that a technical breach of the WTR has not resulted in any loss to the worker.

Even so, in 2010, the Department for Business, Innovation and Skills (BIS) changed the guidance on its website, which now states that rolled-up holiday pay is unlawful and that employers must always pay their workers their normal wages while they are actually taking their annual leave. The 2013 Construction Industry Joint Council agreement is to introduce a new rule “to help rid the industry of the problem”.