Why your business should consider the risks of rolled up holiday pay
The gig economy is vast, with over 1 million people currently employed under zero-hour contracts in the UK. A large proportion of these people are probably receiving rolled-up holiday pay.
Although the European Court of Justice outlawed rolled-up holiday pay in 2006, it is still frequently used, especially for those working casual or zero-hour contract jobs.
It is popular for these employment modes because calculating the holiday pay for these workers can be complicated.
What is rolled-up holiday pay?
The term 'rolled-up holiday pay' refers to a scheme in which employers include their employee's holiday pay within their basic pay. They 'roll' the two payments into one, meaning they do not have to pay their employees when they take their vacation.
The worker gets a slight raise in their hourly rate to account for the holiday pay they do not receive. This benefits the business as they do not have to calculate a worker's holiday entitlement, simplifying their administrative processes.
How is rolled-up holiday pay calculated?
Typically, rolled-up holiday pay is calculated based on a 5.6 week’s holiday allowance per year. On average, the hourly wage of the worker is raised by just over 12%.
There is some confusion amongst employers about the approach to use when calculating rolled-up holiday pay, particularly since the 2006 rulings by the European Court of Justice.
Is rolled-up holiday pay illegal?
Using rolled-up holiday is technically illegal and has been since 2006. The European Court of Justice ruled that rolled-up holiday pay discourages employees from taking holiday because they are not directly paid for their annual leave.
Despite the European Court of Justice's stance, the UK government has not explicitly prohibited the use of rolled-up holiday pay, instead demanding that the employer renegotiate any contract that includes rolled-up holiday pay.
Why is rolled-up holiday pay still used?
Rolled-up holiday pay is far more convenient for employers of zero-hour or casual workers. Their holiday leave is complex to calculate, making it time-consuming. Moreover, factoring in annual leave creates significant issues when creating work rotas. It is instead easier for companies to pay their employees a slightly higher hourly rate.
Workers are often happy to receive rolled-up holiday pay because they are not forced to take holiday days if they do not wish to, and they make a higher hourly wage.
The ruling by the European Court of Justice is ambiguous. It can be interpreted in many ways and taken advantage of by those who wish to continue to use it. It can be interpreted in the following ways:
Holiday pay that has already been rolled up can be used to offset any holiday pay for future holidays.
Only rolled-up holiday compensation that had already been accrued at the time of the court's decision was eligible for set-off.
The set-off is permissible as long as employees are entirely informed about holiday pay arrangements.
The ambiguity of the ruling has led to employers continuing to use rolled-up holiday pay.
Why should you not use rolled-up holiday pay?
The first and most apparent reason to avoid rolled-up holiday pay is that it is technically illegal. This illegality comes with a number of risks.
You may be required to pay your employees twice
If the worker argues they have been deterred from taking holidays, they are entitled to compensation. You may be required to pay them twice. Alternatively, staff may be able to carry their holiday forward to the following year. If they leave the company, they may be able to demand payment in place of holiday when their contract is terminated.
Claims for unlawful deduction of wages
Workers with irregular hours may receive too little or too much money. There is potential for a claim against the business for an unlawful deduction of wages.
A worker might file a lawsuit against the company for incorrectly paying holiday pay which will waste both time and money.
Preserve your business’s reputation
Rolled-up holiday pay is to be avoided due to the numerous risks associated with using it. The extra hours spent calculating the holiday pay for your zero-hour workers pales in comparison to a lengthy lawsuit that could seriously damage your business’s reputation