The practice of paying holiday pay with normal wages throughout the year is referred to as rolled up holiday pay. Whether it is legal or not has been the subject of many cases and much commentary. The position seems to be clear - it is not legal. This article explains the situation in detail.
This is a subject that is of great importance to employers, workers and employees. For employers it can be enormously difficult to work out what holiday pay someone is entitled to if the work variable hours and/or only occasionally. It makes great sense, therefore to roll up holiday pay into the hourly rate. However, this is not allowed! The history of this matter is complicated. At one point rolled up holiday pay was allowed in England and Wales but not in Scotland.
This was because in Munro and MBP Structures Limited, the Scottish Court of Session decided that rolling-up holiday pay into hourly rates could discourage workers and employees from taking their annual leave and therefore this obstructed a main aim of the Working Time Directive. The Court of Session decided that workers or employees should receive holiday pay when they actually take holiday and not in advance or instead of holiday.
However, in England the Employment Appeal Tribunal, in a linked collection of cases, Smith v A J Morrisroes & Sons, JJ Cafferkey and Co Ltd v Byrne and Wiggins v North Yorkshire County Council  IRLR 72, decided the matter differently. It decided that as long as the rolled up holiday pay was genuinely an addition to hourly pay and as long was there was agreement to this then rolling up holiday pay was acceptable. The individual in one of these cases (Mr Caulfield) appealed and eventually the matter was referred to the European Court of Justice to decide. The Caulfield case was joined with another case called Robinson-Steele v P D Retail Services Ltd and it is under this name that the ECJ case has become known. It decided three things:
The UK government didn’t immediately say the rolled up holiday pay was unlawful but about a year after the decision it did do so. It is suspected that that delay was designed to allow employers to change their policies. In fact, it says “Holiday pay should be paid for the time when you actually take your holiday. Your employer cannot include an amount for holiday pay in your hourly rate (called ‘rolled-up holiday pay’). If your current contract still includes rolled-up pay, you and your employer should renegotiate it.” If it does not renegotiate it there is a risk that the worker or employee will bring a tribunal action.
What to do in practice.
Some workers and employees like rolled up holiday pay. Furthermore, many employers like it as well as it is convenient. If an employer wants to continue to roll up holiday pay it should understand the risk that it may end up having to pay twice for any holiday. It should also ensure that its system is transparent, genuine, reflected in the contract, that records are kept and that employees and workers are encouraged to actually take their holidays each year.