The practice of making payments for statutory holiday entitlement through a system of ‘rolled-up holiday pay’ was ruled unlawful by the European Court of Justice as it contravened the EU Working Time Directive. The DTI 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 including an amount for holiday pay in the hourly rate of pay. As a result employers  needed to renegotiate contracts involving ‘rolled-up holiday pay’ for existing workers so that statutory holiday pay is paid at the time when the holiday is taken.

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

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.