Rolled Up Holiday Pay (Employer FAQs)

Rolled up holiday pay is a method of compensating workers for their statutory holiday entitlement by adding an additional amount to their regular wages, rather than providing paid leave when holiday is taken. It is often used for casual and zero-hour contract workers, as it simplifies payroll processes and avoids the administrative burden of calculating leave entitlement separately. Employers typically apply a percentage uplift to a worker’s pay to reflect holiday entitlement.

Although recent changes to UK employment law now allow rolled up holiday pay for irregular hours and part-year workers, employers must ensure compliance with legal requirements. One key risk is the potential for double payment if workers claim they were discouraged from taking their holiday entitlement. If workers are not fully informed, they may seek compensation for unpaid leave despite already receiving rolled up holiday pay. There is also a risk of underpayment if calculations are not accurate, leading to claims for unlawful deduction of wages.

Employers must clearly separate holiday pay from regular earnings on payslips and encourage workers to take their statutory leave.

 

What is rolled up holiday pay?

 

Rolled up holiday pay is a system by which businesses include their workers’ holiday pay in their basic pay, rather than paying them when their holiday is actually taken. It results in a slightly increased hourly rate for the worker and streamlines the administrative process for businesses which do not then have to calculate a worker’s holiday entitlement.

All workers in the UK have a right to holiday pay; one week’s pay for each week of statutory leave. The amount to which they are entitled is calculated by reference to the hours worked and how they are usually paid. For fixed hour workers, this is a fairly simple process, but for casual and zero hour contract workers, the calculations get trickier as businesses need to consider the average number of hours worked to determine the amount of holiday pay the worker is owed. As a result, employers may seek to roll up workers’ holiday pay into their basic pay, especially for flexible workers.

 

Rolled up holiday pay rules changes in 2024

 

In 2024, the UK government introduced significant changes to the rules governing rolled-up holiday pay, particularly affecting irregular hours and part-year workers. Effective from 1 April 2024, for leave years commencing on or after this date, employers are permitted to implement rolled-up holiday pay for these categories of workers. This approach allows employers to include an additional 12.07% of a worker’s pay in each pay period as compensation for holiday entitlement, rather than providing paid time off when the holiday is actually taken.

To comply with the new regulations, employers must ensure that the rolled-up holiday pay is calculated accurately at the 12.07% rate and is clearly itemised as a separate payment on the worker’s payslip. This transparency ensures that workers are aware of the portion of their earnings allocated for holiday pay. It’s important to note that while rolled-up holiday pay simplifies the process, employers still have a legal responsibility to ensure that workers can take the holiday they’re entitled to and are encouraged to do so.

These changes aim to simplify the calculation and payment of holiday pay for workers with varying work patterns, providing greater clarity and consistency in how holiday entitlements are managed.

 

Is rolled up holiday pay allowed?

 

Rolled-up holiday pay is allowed in the UK under specific conditions, following changes to employment regulations that took effect in 2024. Previously, rolled-up holiday pay was considered unlawful under EU regulations, as it was believed to discourage workers from taking their statutory leave entitlement. However, the UK government introduced new rules that permit rolled-up holiday pay for certain categories of workers, providing greater flexibility for employers.

From 1 April 2024, employers can legally include rolled-up holiday pay in the wages of irregular hours and part-year workers. This means that instead of paying employees for holiday periods when they take time off, an additional payment—equivalent to 12.07% of their earnings—can be added to their regular wages to compensate for holiday entitlement. This method simplifies holiday pay calculations for businesses that employ workers with unpredictable or varying work schedules.

Employers must ensure compliance with the new rules by clearly itemising holiday pay as a separate payment on payslips. Transparency is crucial to ensure workers understand that their holiday pay is being paid in advance and to avoid potential disputes. Despite the allowance of rolled-up holiday pay, employers still have a legal duty to encourage and enable workers to take their statutory leave to support their well-being.

While rolled-up holiday pay can be beneficial in managing workforce flexibility, businesses must assess whether it aligns with their operational needs and employment contracts. Employers should also be aware that failing to apply rolled-up holiday pay correctly, or not providing sufficient clarity to workers, could lead to disputes or claims of non-compliance with employment law.

For employers considering rolled-up holiday pay, it is advisable to review contracts, ensure payroll systems are correctly set up, and communicate clearly with employees about how their holiday pay is calculated and paid.

 

How do you calculate rolled up holiday pay?

 

The standard approach for calculating rolled-up holiday pay is to apply an uplift of 12.07% to a worker’s hourly rate. This percentage is derived from the statutory entitlement of 5.6 weeks of paid holiday per year for full-time workers. The calculation is based on the assumption that the worker is employed for the entire year, excluding their statutory leave entitlement.

The formula used to determine the 12.07% figure is as follows:

There are 52 weeks in a year, from which the statutory 5.6 weeks of holiday entitlement are deducted, leaving 46.4 working weeks. The statutory holiday entitlement of 5.6 weeks, divided by the remaining 46.4 working weeks, results in 12.07%. Expressed mathematically:

(5.6 ÷ 46.4) × 100 = 12.07%

For workers with irregular hours, such as zero-hours contracts or part-year employment, the calculation of rolled-up holiday pay requires a more tailored approach. Since their earnings fluctuate, employers should use a reference period to determine holiday pay entitlement. Under the latest UK rules, employers must use the worker’s previous 52 paid weeks, discounting any weeks in which no earnings were received, to calculate an average weekly pay figure. This ensures that holiday pay accurately reflects the worker’s typical earnings pattern.

Employers should ensure that rolled-up holiday pay is clearly itemised on payslips to maintain transparency and compliance with employment law. Additionally, while rolled-up holiday pay provides flexibility, workers must still be encouraged to take their statutory leave to support their well-being and comply with legal requirements.

 

Why do business still use rolled up holiday pay?

 

Businesses that employ casual and zero-hour contract workers often continue to use rolled-up holiday pay due to its administrative convenience. Calculating holiday entitlement and pay for flexible workers can be complex and time-consuming, particularly when working hours vary significantly. Managing annual leave for such workers can also present challenges when creating work rotas, as it requires careful planning to ensure adequate staffing levels. Furthermore, calculating holiday pay for flexible workers can become more complicated when elements such as overtime and commission need to be factored in. As a result, many businesses opt to include rolled-up holiday pay in workers’ regular wages, offering a straightforward solution that eliminates the need for additional calculations.

From the workers’ perspective, rolled-up holiday pay can be attractive as it provides immediate financial benefits, allowing them to receive a higher hourly rate rather than waiting to take paid time off. Some workers prefer this arrangement as it gives them greater control over their income and flexibility in how they choose to manage their work schedules.

However, the legal position regarding rolled-up holiday pay has been subject to change and ongoing debate. Although historically deemed unlawful under European Union law due to concerns that it discouraged workers from taking their statutory leave, recent legislative changes in the UK, effective from 1 April 2024, now permit rolled-up holiday pay for irregular hours and part-year workers. The updated regulations allow employers to include holiday pay as an uplift to wages, provided that it is clearly itemised on payslips and meets the legal percentage requirement of 12.07%.

The European Court of Justice (ECJ) previously ruled that, in certain cases, amounts already paid as rolled-up holiday pay could be offset against future holiday pay obligations, provided that the arrangement was transparent, clear, and comprehensible to the worker. However, the precise interpretation of this ruling remains subject to discussion, as UK courts have not definitively settled the matter since Brexit.

Different interpretations of the ruling have emerged, including:

 

• Rolled-up holiday pay can be offset against any holiday entitlement, provided it is properly documented and understood.
• Rolled-up holiday pay can only be offset against future holiday pay entitlements if payments have been made prior to the leave being taken. For example, if an employee takes holiday in September, rolled-up holiday pay received between January and September could be used to meet their entitlement.
• Some businesses believe that only payments made before the ECJ ruling can be offset against future holiday entitlements.

 

Employers must ensure that rolled-up holiday pay arrangements comply with current UK employment law and are clearly communicated to workers. Transparency in payslips and employment contracts is essential to avoid disputes and to ensure compliance with the statutory requirements. While rolled-up holiday pay offers operational advantages for businesses, it is crucial to balance these benefits with the legal obligation to encourage workers to take their statutory holiday entitlement.

 

Rolled up holiday pay and zero hour contract workers

 

Zero-hour contract workers are entitled to paid time off work, just like any other employees. Recent changes to UK employment law, effective from 1 April 2024, now permit rolled-up holiday pay for workers with irregular hours, including those on zero-hour contracts. Under these updated regulations, rolled-up holiday pay can be legally used if specific conditions are met, such as ensuring that holiday pay is clearly itemised on payslips and paid at the correct rate.

The entitlement to holiday pay for zero-hour contract workers is calculated based on their average weekly earnings over the previous 52 paid weeks, excluding any weeks in which no work was performed. If a worker has not worked for a full 52 weeks, only the weeks in which they were paid should be considered. The reference period may extend beyond 52 weeks if necessary but cannot exceed 104 weeks in total. This ensures that holiday pay reflects the worker’s typical earnings and accounts for fluctuations in working hours.

Employers must ensure that rolled-up holiday pay is distinguished from basic pay on the worker’s payslip to maintain transparency and compliance with employment law. Proper documentation and clear communication with employees about their holiday pay entitlement are essential to avoid potential disputes and to ensure workers understand their rights.

While rolled-up holiday pay provides flexibility and simplifies payroll management for businesses employing zero-hour contract workers, employers still have a legal responsibility to encourage workers to take their statutory leave. This helps to promote worker well-being and ensures compliance with the Working Time Regulations.

 

What are the risks for employers of using rolled up holiday pay?

 

While rolled-up holiday pay is now permitted under specific conditions for certain workers, employers who use it must carefully consider potential risks to ensure compliance with employment law and avoid costly disputes.

One of the main risks is the potential for double payment. If a worker can demonstrate that they were discouraged from taking their statutory holiday entitlement, they may be entitled to compensation deemed ‘just and equitable.’ This could result in the employer having to pay holiday pay twice—once through rolled-up holiday pay and again as compensation for the failure to allow proper holiday entitlement. Alternatively, workers may be able to carry over unused holiday entitlement to the following leave year. If they then leave the business, they could claim payment in lieu of untaken holiday upon termination of their contract.

Another significant risk is that workers with irregular hours may not receive the correct holiday pay. The rolled-up holiday pay system assumes a consistent earnings pattern, which may not accurately reflect the fluctuating hours of casual and zero-hour workers. This could lead to claims for unlawful deduction of wages if workers are underpaid, or potential overpayments that could become a financial burden for the employer.

There is also ongoing legal uncertainty surrounding the historic use of rolled-up holiday pay. Although the European Court of Justice (ECJ) previously ruled that amounts already paid under this system could be set off against holiday pay claims, the precise interpretation and future rulings on this matter remain unclear. If further clarification confirms that set-off was only permitted for payments made before the 2006 ECJ ruling, businesses that continued to use rolled-up holiday pay afterwards could face substantial backdated liabilities.

Additionally, even if no legal claims arise, employees who feel they are not receiving their full entitlements could raise a grievance with the employer. Dealing with such complaints can consume valuable management time and create workplace dissatisfaction.

To mitigate these risks, businesses that continue to use rolled-up holiday pay should consider reviewing their payroll systems and employment contracts. The most legally sound approach is to ensure workers receive holiday pay when they take their leave, which aligns with best employment practices. There are now various payroll software solutions available that can simplify the calculation of holiday entitlements for casual and zero-hour workers. The UK government also provides an online holiday pay calculator to assist employers in calculating entitlements accurately.

If an employer decides to continue using rolled-up holiday pay, it is essential to implement a transparent and compliant system. Workers should be fully informed of the arrangement at the time of hiring, with written acknowledgment that they understand their entitlement to take paid leave if they wish. However, it is important to note that, according to the ECJ, workers cannot legally contract out of their right to statutory holiday entitlement.

Employers should also ensure that payslips clearly distinguish between basic pay and the holiday pay component, and that workers are not discouraged from taking leave. In fact, employers should actively encourage their staff to take their entitled holiday to promote well-being and avoid potential disputes.

 

Need assistance?

 

As employment law specialists, we can assist if you have any queries relating to holiday pay and employee entitlements to pay and time off work. Speak to our experts today for advice on using rolled up holiday pay or alternatives to suit your business.

 

Rolled up holiday pay FAQs

Is rolled up holiday pay legal in the UK?

As of April 2024, rolled-up holiday pay is permitted for workers with irregular hours or part-year contracts. Employers must ensure that holiday pay is clearly itemised on payslips and paid at the correct rate to comply with employment law.

 

How is rolled up holiday pay calculated?

Rolled up holiday pay is typically calculated by applying an additional 12.07% to a worker’s wages. This percentage is based on the statutory entitlement of 5.6 weeks of holiday per year for a full-time worker.

 

Can an employer pay rolled up holiday pay instead of giving time off?

Workers are still entitled to take their statutory holiday leave. Employers must encourage employees to take their holiday entitlement to ensure compliance with the Working Time Regulations.

 

Who can receive rolled up holiday pay?

Workers with irregular hours, such as those on zero-hour or part-year contracts, are eligible for rolled-up holiday pay under the updated rules. Permanent full-time employees should continue to receive holiday pay in the traditional way.

 

What are the risks of using rolled-up holiday pay?

There is a risk that workers may not take their entitled leave, which could lead to legal challenges. Additionally, if rolled up holiday pay is not correctly calculated or itemised, businesses may face claims for underpayment or unlawful deductions.

 

Should rolled-up holiday pay be shown separately on payslips?

To comply with legal requirements, rolled-up holiday pay must be displayed as a separate line item on payslips, making it clear to workers what portion of their pay is allocated for holiday entitlement.

 

Can rolled-up holiday pay be used in all industries?

While rolled up holiday pay is allowed for irregular hours and part-year workers, its use should be carefully considered in sectors with varying pay structures to ensure compliance with industry regulations and contractual agreements.

 

What happens if a worker leaves without taking their holiday?

If a worker leaves their job without taking their statutory holiday, they are entitled to receive payment in lieu of untaken leave, which must be calculated based on their average earnings over the previous 52 paid weeks.

 

Glossary

 

 

Term	Definition
Rolled Up Holiday Pay	A method of including holiday pay within regular wages, rather than paying it separately when leave is taken.
Statutory Holiday Entitlement	The minimum amount of paid holiday that workers are legally entitled to under UK law, currently 5.6 weeks per year.
Irregular Hours Worker	An employee or worker whose working hours vary from week to week, such as those on zero-hour contracts.
Part-Year Worker	An individual who is employed for part of the year only, such as seasonal workers or term-time employees.
Working Time Regulations	UK legislation that governs working hours, rest breaks, and paid annual leave entitlements for employees.
Holiday Pay Calculation	The process of determining the amount of holiday pay owed to a worker, often calculated using a 12.07% uplift.
12.07% Calculation	The percentage used to calculate holiday pay, based on the assumption of 5.6 weeks of leave out of 46.4 working weeks.
Reference Period	A period of 52 paid weeks used to calculate holiday pay entitlement for workers with irregular working patterns.
Unlawful Deduction of Wages	A claim made by workers when an employer fails to pay wages or holiday pay correctly, potentially leading to legal disputes.
Holiday Carry-Over	The right of workers to transfer unused statutory holiday entitlement to the following leave year under certain conditions.
Itemised Payslip	A payslip that clearly separates basic pay and holiday pay to ensure transparency and compliance with legal requirements.
Zero-Hour Contract	A type of employment contract where the employer is not obliged to provide a set number of working hours.
Employment Contract	A legal agreement between an employer and employee that outlines terms and conditions, including holiday pay arrangements.
Holiday Pay Disputes	Legal disagreements that arise when workers believe they have not received the correct holiday pay entitlement.
Set-Off	The process of offsetting holiday pay already included in wages against any future claims for unpaid holiday entitlement.