English EAT decision on 'rolling up' holiday pay into basic pay

NOTE this news item has been superseded by a European Court case and the information here is no longer valid. We have added an up to date article in our Knowledge Base section.

The English Employment Appeal Tribunal (EAT) has considered whether it is lawful to ‘roll up holiday pay into basic pay. This is the practice of not paying holiday pay during holidays but paying a small supplement to normal pay throughout the year. Employers can already do this for holiday pay over and above the 4 week minimum under the Working Time Regulations but what about those first four weeks?

The recent case, ‘Marshalls Clay Products Ltd v Caulfield’ said that there were five possibilities:

• Category 1: Contracts between the workers and the employer, which do not deal with holiday pay.
• Category 2: Contracts which purport to exclude any liability for or entitlement to holiday pay.
• Category 3: Contracts where the rates are said to include holiday pay but there is no indication or specification of an amount.
• Category 4: Contracts providing for a basic wage or rate topped up by a specific sum or percentage in respect of holiday pay.
• Category 5: Contracts where holiday pay is allocated to and paid during (or immediately prior to or immediately after) specific periods of holiday.

The decision of the court is that Category 5 clearly satisfies the Regulations and categories 1 to 3 do not. It also said that Category 4 was permissible but gave guidelines: which in practice are more likely to constitute conditions:

a) The rolled-up holiday pay must be clearly incorporated into the individual contract of employment, and thus expressly agreed.

b) The allocation of the percentage or amount to holiday pay must be clearly identified in the contract, and preferably also in the payslip.

c) It must amount to a true addition to the contractual rate of pay.

d) Records of holidays taken must be kept.

e) Reasonably practicable steps must be taken to require the workers to take their holidays before the expiry of the relevant holiday year.

The answer therefore, is to either pay holiday pay at holiday time or make sure the rolled up holiday pay is properly dealt with in the contract and genuine.

For up to date information on rolled up holiday pay please see our Knowledge Base Section

2020 review of the above - a correct summary of the law as at that time but now wrong as per the Robinson-Steele case in the ECJ: rolled up holiday pay is unlawful. The best solution for employers is to use a holiday pay calculation program incorporated into its payroll program to calculate workers’ (which includes employees’) WTR 1998 holiday entitlement when holiday is taken during employment and on termination. We note that in the 17 years since this firm put that article on its website it has consistently generated traffic to the site and inquiries from potential clients.