The Working Time Regulations 1998 (WTR) make it clear that every worker in the UK has the right to take annual leave and be paid their wages over that time. This applies regardless of whether they work full or part-time, or if they work irregular hours or on a zero-hours contract.
The amount of holiday pay they are entitled to is determined by looking at the hours worked and how they are usually paid. This is fairly simple for fixed-hours workers. For employers who employ workers with irregular hours or who work part of the year, however, calculating holiday pay can be trickier.
As a result, the practice of rolling up employees’ holiday pay into their basic pay became a common practice amongst businesses employing such workers. In this article, we explain what exactly rolled-up holiday is and whether it is currently legal in the UK.
What is Rolled-Up Holiday Pay?
Workers in the UK are entitled to at least 5.6 weeks (or 28 days of annual holiday pay), pro rata to the number of contracted hours they work.
Common practice is for holiday pay to be paid separately from an employee’s basic salary. In these circumstances, an employee will get paid for their holiday when they take it.
Rolled-up holiday pay is when businesses spread holiday pay over the year, by including their workers’ holiday pay in their basic pay, instead of paying them when their holiday is actually taken.
Why do Businesses Roll Up Holiday Pay?
Paying holiday pay in this manner reduces administrative costs and makes the calculation of holiday pay simpler, especially for employers with casual workers or those with zero-hour contracts.
It also results in a slightly increased hourly rate for the worker and allows them to easily take holidays at a time that suits them, i.e. when work is sparse.
Is Rolled-Up Holiday Pay Lawful?
Rolled up holiday was technically unlawful following the European Court of Justice’s ruling in Robinson-Steele v PD Retail Services and others case. In this case, the Court held that payment for holidays should be made when the actual holidays are taken. It was concerned that workers may otherwise not be incentivised to take leave as they were not being paid directly for it.
Calculating casual and zero-hour contract workers’ holiday entitlement can be quite complicated for employers. They need to determine the average number of hours worked to establish the amount of holiday pay the worker is owed. As a result, many businesses in a variety of sectors continued to roll up holiday pay, despite it having been considered unlawful.
In 2022, however, the Supreme Court confirmed in Harpur Trust v Brazel that rolled-up holiday pay was unlawful and employers had to do a complex calculation to determine holiday pay.
Rolled-Up Holiday Pay Still Unlawful Since April 2024?
In response to the Supreme Court’s decision and the difficulties presented by it, the government introduced the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, which came into force on 1 January 2024, paving the way for reforms of holiday entitlement and holiday pay calculations in the WTR 1998.
The new legislation confirms that for holiday years starting on or after 1 April 2024, employers can now once again use rolled-up holiday pay for irregular hours and part-year workers only. It is important to be aware, though, that the use of rolled-up holiday pay requires compliance with legal requirements now set out in the WTR 1998.
Rolled-up holiday pay for employees who are not irregular hours or part-year workers remains unlawful.
How are Irregular and Part-Year Workers Defined?
The new regulations set out a definition for irregular and part-year workers, giving employers more clarity on who is eligible for rolled-up holiday pay.
Irregular-hour workers are defined as workers whose working hours in each pay period are, under the contract, ‘wholly or mostly variable.’
Part-year workers are defined in the new legislation as workers who are required to work only part of the year, with periods of at least a week during which they are not required to work and are not paid.
The new law will apply to most workers on zero-hours contracts, gig-economy workers and other casual workers.
How Do I Calculate Rolled-Up Holiday Pay?
If you choose to use roll-up pay for irregular and part-year workers, you must follow the calculation method now set out in the WTR 1998.
For leave years commencing on or after 1 April 2024, holiday entitlement for irregular hours and part-year workers should be worked out in hours, rather than weeks. It will be paid by adding 12.07% to actual hours worked in a pay period (whether it is monthly, weekly or daily).
This calculation represents a worker’s statutory entitlement to at least 5.6 weeks leave each year as a proportion of a working year of 46.4 weeks (52 weeks - 5.6 weeks) = 12.07%.
This calculation method represents the correct percentage to be used for employees who are only entitled to the statutory minimum holiday entitlement and was widely used by employers before the Harpur Trust case.
So, for example, if an irregular hours worker was entitled to £11.44 per hour (being the national living wage rate as of April 2024), using the 12.07 % uplift, they would be paid an additional £1.38 as rolled-up holiday pay for every hour that they work.
More advice on calculating roll-up holidays can be found here.
Rolled-up holiday pay should be paid at the same time as pay for work done and should be separately itemised on the worker’s payslip. Furthermore, the system of making the payments should be transparent.
Rolled-up holiday pay is not compulsory; employers can carry on using the 52-week reference period to calculate holiday pay for atypical workers if they do not want to use rolled-up holiday pay.
Rolled-Up Holiday Pay and Maternity Leave
There are special rules that apply where irregular hours and part-year workers take maternity or other family-related leave within an annual leave year. In these circumstances, the worker continues to accrue statutory (and contractual) annual leave during any period of statutory maternity leave in the same way as if they had been at work.
As a result, the 12.07% method is not workable. Instead, employers will need to calculate rolled-up holidays for part-year or irregular-hour workers based on the average hours that they worked per week over the 52 weeks preceding the start of their maternity leave.
What are the Pitfalls Involved with Using Rolled-Up Holiday Pay?
There is no scope within the rolled-up holiday pay option for differentiating between different types of leave and paying them at separate rates. The additional pay must be paid on all earnings. There may be some circumstances in which that could make holidays more costly.
A risk involved with rolled-up holiday pay is that those who work irregular hours may not receive the correct amount of holiday pay under the rolled-up holiday pay system. If this happens, there is a danger that this could lead to a claim against the business for an unlawful deduction of wages.
Practical Steps for Employers to Consider
Employers will still need to make sure that their workers actually take their full annual leave entitlement. This duty continues even if that holiday time has been paid through rolled-up holiday pay. Rolling up holiday does not mean that workers can work 52 weeks of a year, without taking holiday – it just means that leave taken is technically unpaid as holiday pay has already been factored into basic pay.
As a result, employers will need to review processes for reminding workers to use their holiday entitlement and explain that their unused holiday entitlement will be lost if not taken. This should be done to comply with the WTR 1998 but also to enable workers to rest, recover and ensure they can maintain performance levels.
The WTR 1998 and government guidance focus on the legal minimum entitlement of 5.6 weeks paid holiday. However, employers may have workers on contracts entitling them to additional paid holidays beyond the statutory minimum. The new methods of calculating rolled-up holiday pay can be easily adjusted to provide this.
Employers should ensure that they are accurately assessing the status and working arrangements of all their workers. Employers should review the definitions for irregular-hour workers and part-year workers alongside their employees’ contracts to identify those that will fall under the new calculation method for statutory holidays.
While rolled-up holiday pay is not mandatory, the new law will be a welcomed development for employers struggling with how to calculate holiday entitlement and pay for atypical workers.
If you have any queries relating to holiday pay or would like support with using rolled-up holiday pay, contact our expert employment today via email.
FAQ
What exactly is rolled-up holiday pay?
Rolled-up holiday pay is the practice of paying an employee’s holiday pay at the same time as basic pay, rather than paying it when the employee actually takes time off.
Is rolling-up holiday permitted in the UK?
The law now permits the use of rolled-up holiday pay for holiday years starting on or after 1 April 2024 for irregular hours or part-year workers. However, certain conditions do need to be satisfied.
Rolled-up holiday pay remains unlawful for all other types of workers.
How do I calculate rolled-up holiday pay for my eligible workers?
For leave years beginning on or after 1 April 2024, rolled-up holiday pay for irregular and part-year workers should be calculated in hours, not weeks and at a rate of 12.07% of total pay in a pay period. This percentage is based on the statutory minimum holiday entitlement of 5.6 weeks.
