When you are a business owner, it is vital that you are aware of the best practices of annual leave entitlement. One of the issues that frequently comes up is the issue of “rolled-up” holiday pay.
This term refers to a situation where employees are routinely paid a sum of money with their usual wages which is labelled as “holiday pay”, even though they are not actually taking any time off.
When the employee actually comes to take a holiday, they are paid nothing, as they have already had the money.
The practice of rolled-up holiday pay was traditionally used to deal with the holiday entitlement of casual or short-term workers.
However, the courts have confirmed that rolled-up holiday pay is in fact unlawful.
One of the reasons for this is that rolled-up holiday pay can dissuade employees from taking adequate rest time unless they have budgeted carefully and saved their holiday pay.
The proper approach is for the employer to accumulate adequate funds to allow employees to take sufficient time off and to be paid for it at the same time, rather than having their holiday pay spread out over the year.
Whether you own a start-up or a more established organisation, it is essential that you have a clear annual leave policy in place so that your employees are aware of what they are entitled to and the process that they have to take in order to have holiday requests accepted.
Before the Working Time Directive 1998
Before the Working Time Directive 1998, there was no general statutory level of paid holiday entitlement and provision could vary significantly.
But with the introduction of the directive and the Working Time Regulations 1998, workers were given clear legal rights to a prescribed level of paid annual leave.
The practice of rolled-up holiday pay was often used in sectors where the availability of work could vary, such as construction, factory work and retail.
But it was ruled unlawful in 2006 in the case of Robinson-Steel Vs. PD Retail Services. The courts ruled that holiday pay is to be paid at the exact time that it is taken and that any existing contracts which contained the notion of rolled-up pay should, therefore, be renegotiated.
Although there are a number of businesses across the UK that are still implementing rolled-up holiday pay in their policies, it has, for the most part, died out since the WTR. It is most commonly found in businesses that hire part-time and casual workers.
Rather confusingly however, in the 2006 case mentioned above, the European Court of Justice also said that sums already paid to a worker under a rolled-up holiday pay scheme could legally set off against any claim made by the employee for unpaid holiday pay, provided that there was a consensual agreement identifying the sums properly attributable to periods of holiday. A worker could still, however, claim for a period of compensatory rest time if they have been prevented from taking sufficient time off.
The Situation Today
Rolled-up holiday pay is still considered unlawful within the UK - even if it is clearly stated.
Following the decisions made by the courts, employers should be aware of the correct practices so that they can give employees the annual leave entitlement that they are subject to.
However, if they are casual or part-time workers, it might still pose a problem for many businesses who want to offer rolled-up holiday pay, mainly as it can be difficult to deal with holiday entitlement for workers who may only work infrequently.
In this case, as well as making it fully transparent, it can be a good solution to invest in proper HR software which will calculate the annual leave that they have taken and exactly how much you owe them.