Rolled-up Holiday Pay
What is rolled-up holiday pay?
Traditionally, holiday pay is paid separately from basic pay as and when a worker decides to take their annual leave allowance. The concept of ‘rolling up’ holiday pay involves paying holiday pay together with normal pay, rather than paying the holiday pay at the time that the worker actually takes annual leave. The worker therefore receives an enhanced hourly rate to compensate for the fact that they will not receive any holiday pay when their holiday is taken.
The proposals, which have come from the Government’s policy paper ‘Smarter Regulation to Grow the Economy’, are designed to reflect the changing nature of our economy and to protect the growing numbers of workers in atypical employment who are at risk of missing out on their holiday pay.
The government is proposing to allow rolled-up holiday pay to be paid at 12.07% of pay, in line with the proportion of statutory annual leave in relation to the working weeks of each year. Whilst some employers are already doing this, the reforms would provide greater clarity and a guarantee of holiday pay for many workers.
Concerns over rolled-up holiday pay
Allowing rolled-up holiday pay has technically been unlawful for some years. All UK workers have an entitlement to holiday pay under the Working Time Regulations 1998, which provides that leave may not be replaced by a payment in lieu, other than on termination of employment. A key concern is that workers might be deterred from taking their holiday if they could be paid more by not doing so.
However, the Employment Appeals Tribunal (EAT) held in Marshalls Clay v Caulfield that rolled-up holiday pay arrangements could be lawful as long as they were expressly incorporated into a binding contract and the amount paid in respect of holiday pay was adequately transparent. Despite this judgement, no discernible criteria for a clear and transparent contract term on rolled-up holiday pay has previously been introduced.
Advantages for employers and employees
In practice, it has been common to offer rolled-up holiday pay to workers with irregular hours, primarily those in casual employment and some permanent shift workers. However, without clear guidance on how to calculate it, the practical difficulties have persisted, resulting in a lack of consistency between employers.
If an employer does choose to start paying rolled-up holiday pay, they will need to inform their workers of this decision and clearly distinguish the holiday pay from the normal working hours on payslips. Clearly separating the payments in this way prevents unscrupulous employers from claiming that holiday pay is included in the basic rate of pay in order to effectively underpay workers.
The reforms would therefore assist employers in calculating the amount of rolled-up holiday pay due to their staff whilst also ensuring that workers can clearly see whether they are receiving their statutory right to holiday pay.
The concept of rolled-up holiday is nothing new and has in fact been implemented in some sectors for many years. However, the reforms provide for a clearer and more reliable way for employers to provide it if the traditional method of paying holiday pay does not align with their working practices.