The practice of making payments for statutory holiday entitlement through a system of ‘rolled-up holiday pay’ has been ruled unlawful by the European Court of Justice as it contravenes the EU Working Time Directive. The DTI has amended its Working Time Regulations guidance to reflect this judgment.

The Court decided that employers should be paying holiday pay at the time their workers actually take their holidays rather than include an amount for holiday pay in the hourly rate of pay. As a result employers will need to renegotiate contracts involving ‘rolled-up holiday pay’ for existing workers as soon as possible so that statutory holiday pay is made at the time when the holiday is taken.

The DTI believes that although the Court of Justice found rolled-up holiday pay unlawful the judgement allows for off-set of payments already made whilst the practice is discontinued. Therefore whilst employers are in the process of changing their pay arrangements in order to eliminate rolled-up holiday pay payments which are transparent and comprehensible can continue to be offset against what has to be eventually paid.

These cases will now go back to the Court of Appeal (Messrs Clarke, Caulfield and Barnes) and Leeds Employment Tribunal (Robinson-Steele) to make their decisions in light of what the ECJ has ruled.

Rolled up holiday pay is where the hourly rate includes an element in respect of holiday pay to reflect the fact that the worker is entitled to 4 weeks holiday in every 52. It tends to be used for workers on short term contracts or casual workers where it might be administratively convenient for holiday pay to be paid in equal instalments rather than have to work out the sum due on every occasion leave is taken. In some cases it might be difficult for the worker to take leave during the period of work - e.g. an agency teacher employed for a term to cover for absence or a cameraman on a film location for a couple of months.