Is it ok to include holiday pay in hourly rate? Rolled-up holiday pay is unlawful.
Is it ok to include holiday pay in a worker’s hourly rate?
The short answer is – no, because it is unlawful to pay rolled up holiday pay.
Rolled-up holiday pay is the practice of enhancing pay to cover holiday pay, instead of paying holiday pay while an employee or worker is on holiday.
Some employers calculate rolled-up holiday pay as an additional 12.07% on top of hourly rate.
This practice is unlawful. Paying rolled up holiday pay instead of pay while an employee is on leave, has been found to defeat the objective of the holiday pay legislation (Working Time directive). This is because it could put employees off from taking leave.
While rolled up holiday pay is technically unlawful, sums already paid to a worker/employee under a transparent and comprehensible rolled up holiday pay arrangement can be off set against any claim for unpaid holiday pay.
Government guidance states: “Holiday pay should be paid for the time when annual leave is taken. An employer cannot include an amount for holiday pay in the hourly rate (known as ‘rolled-up holiday pay’). If a current contract still includes rolled-up pay, it needs to be re-negotiated.”
Some employers still choose to use the rolled up holiday pay method. The risks of this are:
1. A worker who claims they have not been able to take holiday is entitled to compensation. This could mean the employer effectively has to pay twice for holiday;
2. A worker prevented from taking holiday may be able to carry it over into next holiday year and claim a large sum of outstanding holiday on termination of employment;
3. The calculation of 12.07% may not give the worker the correct holiday, particularly if they have irregular hours; and
4. The set off rule may be interpreted restrictively.
How to move away from rolled-up holiday pay?
There is still a major issue – how do you deal with the holiday entitlement of casual or short-term workers. It may be sensible to pay holiday entitlement at the end of an assignment or the end of the holiday year. Alternatively, a computer software package may be needed to calculate holiday for a worker at any given time.
If you have any questions surrounding holiday pay, employment law or HR related matters, please do not hesitate to contact Kate Brooks or call 01202 525333.