Rolled-up holiday pay refers to the practice of including an extra element of holiday pay in workers normal pay and not paying them when they actually take holiday. This can be administratively convenient, particularly where employers have a lot of temporary, seasonal or shift workers. However, there has been a debate for some years now as to whether the practice is actually lawful.

The European Court of Justice ("ECJ") has now handed a Judgment on the issue and ruled that holiday pay cannot be rolled-up into remuneration and must be identified as a separate additional sum.

However, the Judgment has caused some confusion as the ECJ went on to say that sums paid "transparently and comprehensively" on a rolled-up basis can be off-set against the payment for specific leave which is actually taken by the worker. Some commentators have interpreted this as meaning that whilst rolled-up holiday pay is unlawful, any worker who brings a case is unlikely to be awarded anything, even if they are successful. However, a full reading of the Judgment makes it clear that this concession only applies to rolled-up holiday payments which have already been made. In other words, the Judgment is not retrospective provided the holiday element has already been clearly paid by the employer as an additional sum.

It does not therefore appear that the ECJ has granted a continuing dispensation for rolled-up holiday pay and this is emphasised in the DTI’s guidance which now says "rolled-up holiday pay is considered unlawful and employers should re-negotiate contracts involving rolled-up holiday pay for existing employees/workers as soon as possible so that payment for statutory annual leave is made at the time when the leave is taken."

When giving its Judgment, the ECJ was influenced by the fact that the Working Time Directive is a health and safety measure and the way people are paid for holiday should not prevent them taking it.

What about the risks of retrospective claims?

If you have been rolling-up your workers’ holiday pay but this has not been done transparently and comprehensively, there is a risk that the sums paid will not be off-set against any claims brought by workers. You will need to be able to prove that the sums allocated to holiday pay were specifically set out in payslips and that the worker understood that his wage included an element of holiday pay.

Employees or workers who were not aware that their wage included an element for holiday may now be seeking legal advice as to their remedies. Given the potential costs of these claims, employers would be well advised to cease the practice of rolled-up holiday pay in the future.