European court slaps ban on rolled-up holiday pay

The Department of Trade and Industry (DTI) has amended its regulatory guidance on rolled-up holiday pay and officially outlawed the practice.

Employers will no longer be able to include holiday pay in workers’ hourly rates, but must pay them at the time they actually take the leave.

The move follows a ruling in March by the European Court of Justice (ECJ), which said it was unlawful to spread holiday pay throughout the year by adding it to the normal hourly rate of pay. The issue was referred to the ECJ by the Court of Appeal following conflicting decisions about whether this was lawful (see Labour Research, March 2005).

The ECJ said that, although the European Working Time Directive does not specify when holiday must be paid, the practice of rolled-up holiday pay could mean that workers are paid in lieu of taking their leave — which the directive specifically prohibits.

The practice is therefore unlawful, although the ECJ held that payments already made can be set off against holiday pay when it is taken.

The new DTI guidance says: “Employers should renegotiate contracts involving rolled-up holiday pay for existing workers as soon as possible so that payment for statutory annual leave is made at the time when the leave is taken.”

The guidance is available at www.dti.gov.uk/er/work_time_regs/wtr7.htm#section7