Rolled-up holiday pay legality

This is a common and important question, and the answer is more nuanced than many employers realise.

Legal position:

Under the Working Time Regulations 1998, almost all workers are entitled to a minimum of 5.6 weeks of paid annual leave per year. This is a fundamental right and cannot be contracted out of.

The practice of including holiday pay within the hourly rate is sometimes called "rolled-up holiday pay." For many years this was treated as unlawful following the European Court of Justice decision in Robinson-Steele v RD Retail Services Ltd (2006), which held that rolled-up holiday pay did not comply with the Working Time Directive because it did not ensure workers actually took their leave. The concern was that rolling holiday pay into the hourly rate acts as a disincentive to taking time off, which defeats the health and safety purpose behind the entitlement.

Recent change:

The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, which came into force on 1 January 2024, made a significant change. Rolled-up holiday pay is now expressly permitted for irregular hours workers and part-year workers only. For these categories of worker, the employer may calculate holiday pay as 12.07 per cent of the worker's total pay in each pay period and pay it alongside normal wages.

This means the legal position now depends on which type of worker you are:

1. If you are an irregular hours worker or a part-year worker, your employer may lawfully include holiday pay in your hourly rate, provided it is calculated correctly and shown transparently, usually as a separate line on your payslip.

2. If you are a regular hours worker working throughout the year, rolled-up holiday pay remains non-compliant. Your employer should instead allow you to take paid leave in the normal way, paying you your normal rate when you are on holiday.

What counts as an irregular hours worker or part-year worker:

An irregular hours worker is someone whose paid hours are wholly or mostly variable in each pay period. A part-year worker is someone who, under the terms of their contract, is required to work only part of the year and there are periods within the year of at least a week when they are not required to work and are not paid. Typical examples include casual, zero-hours, or seasonal workers.

Practical points:

If your employer is including holiday pay in your hourly rate, you should check first whether you fall into one of the categories where this is now permitted. If you do, the arrangement can be lawful but the holiday element should be clearly identified, not simply hidden within a headline rate.

If you are a regular hours worker and your employer is rolling up your holiday pay, this is not compliant. You are still entitled to take your statutory leave and be paid for it. The employer cannot argue that you have already been compensated through a higher hourly rate to avoid paying you when you take leave. In practice, if you have received rolled-up holiday pay, a tribunal would take it into account to avoid double payment, but the arrangement itself remains improper.

If you believe your employer is not handling your holiday pay correctly, a sensible first step is to raise it informally or in writing, pointing to your statutory entitlement. If that does not resolve it, you could consider contacting ACAS for early conciliation, which is a prerequisite before bringing a claim to an employment tribunal for unlawful deductions from wages or failure to provide paid leave.

The key question to answer is whether your working pattern puts you in the irregular hours or part-year worker category, because that determines whether the arrangement is lawful.