Rolled-up holiday pay is a method of compensating workers for their statutory holiday entitlement by including an additional payment within their hourly wage. This means that instead of receiving paid time off, workers get extra pay on top of their regular earnings. While UK employment law now permits rolled-up holiday pay for irregular hours and part-year workers, employers must still comply with all legal requirements.
You must always encourage your employees to take their annual leave to ensure they get the breaks they need. Not only is this important for wellbeing, you also have legal responsibilities as an employer.
How to Calculate Rolled-Up Holiday Pay
To ensure workers receive the correct holiday pay, you must calculate it accurately. Here’s a simple formula:
- Identify the worker’s hourly rate.
- Calculate 12.07% of their hourly earnings (as this represents the statutory annual leave of 5.6 weeks out of 46.4 working weeks).
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Add this amount to the worker’s basic hourly wage.
For some irregular hours workers, holiday pay will need to be calculated differently. Therefore, employees should average earnings over the past 52 paid weeks, excluding weeks with no pay, to ensure holiday pay reflects typical earnings.
You must always ensure holiday pay is clearly stated on payslips and this is separate from regular pay.
Is Rolled-Up Holiday Pay Illegal in the UK?
Historically, rolled-up holiday pay was considered unlawful under EU law because it discouraged workers from taking their statutory leave. However, the UK government has revised its stance, and from April 2024, rolled-up holiday pay is legally permitted for workers with irregular hours, such as those on zero-hour contracts. The key requirement is that employers must clearly separate and itemise holiday pay on employee payslips to maintain transparency and compliance. This change provides flexibility while ensuring that employees still receive their rightful holiday entitlement.
In the UK, irregular hours and part-year workers are defined as follows:
- Irregular hours workers have variable paid hours per pay period, as stated in their contract.
- Part-year workers work only part of the year, with at least one unpaid week. Their contract specifies this arrangement.
Rolled Up Holiday Pay Changes 2024
The UK government has introduced changes to holiday pay calculations in 2024, particularly impacting irregular-hours and part-year workers. Key updates include:
- Legality of Rolled-Up Holiday Pay: From April 2024, rolled-up holiday pay is permitted for workers with irregular hours, such as those on zero-hour contracts. Employers must clearly itemise this in payslips.
- 12.07% Calculation Confirmed: The 12.07% approach is officially recognised, making it easier for employers to ensure compliance.
- Clarity for Zero-Hour Contracts: The new rules aim to provide better clarity for zero-hour and casual workers, ensuring fair and transparent pay structures.
What Are the Risks of Rolled-Up Holiday Pay?
While the 2024 changes clarify the use of rolled-up holiday pay, there are still risks to consider:
- Double Payment: A key risk is double payment. If a worker proves they were discouraged from taking statutory holidays, they may receive compensation effectively leading to two payments—once via rolled-up holiday pay and again as compensation. Alternatively, unused holiday entitlement may be carried over, and if the worker leaves, they could claim payment for untaken leave.
- Potential for Misuse: Employers must ensure workers understand that they are receiving holiday pay and that it is correctly documented.
- Compliance with Payslip Requirements: The additional pay must be itemised clearly to avoid legal issues.
- Worker Satisfaction: Some employees may prefer to take paid time off rather than receive extra pay. Employers must communicate policies clearly to avoid confusion or disputes.
- Incorrect Payments: Failing to apply the correct percentage or miscalculating the entitlement could result in claims for underpayment.
To reduce risks, businesses using rolled-up holiday pay should review payroll systems and employment contracts. The best approach is to pay workers for holidays when they take leave, following best practices. Payroll software can help simplify holiday entitlement calculations for casual and zero-hour workers. If you would like help with your payroll, our team are here to help.
Alternatives to Rolled-Up Holiday Pay
For employers who want to avoid the risks associated with rolled-up holiday pay, there are alternative methods to ensure compliance with holiday entitlement regulations:
- Accrued Holiday Pay: Employers can track and provide employees with their holiday entitlement based on the hours worked. This ensures workers take actual time off while still receiving their entitled pay.
- Separate holiday payments: This method involves paying holiday pay as a lump sum or in instalments, separate from regular wages. It offers employees greater pay transparency but can be more time-consuming for employers to manage.
Each alternative provides a structured approach to managing holiday pay while ensuring compliance with employment regulations.
Final Thoughts
Rolled up holiday pay can be a useful way to ensure workers receive their holiday entitlement, especially for those on irregular contracts. However, with new rules coming into effect in 2024, employers must ensure compliance to avoid legal risks. Even though rolled-up holiday pay may feel like a good option, you should always encourage employees to take their holiday entitlement. Taking time off is essential for employee wellbeing and legal compliance.
Encouraging staff to take their allocated leave ensures they rest and recharge, leading to increased productivity and job satisfaction. Employers should create a culture that values time off, reinforcing the importance of mental health and work-life balance. Additionally, businesses that prioritise employees’ wellbeing benefit from reduced absenteeism, higher morale, and improved retention rates.
By working with HR experts like The HR Booth, you can manage holiday pay effectively and keep your workforce happy while staying compliant with UK employment laws. If you need further guidance, don’t hesitate to contact us for expert support and advice tailored to your business needs.
How The HR Booth Can Help
At The HR Booth, we provide expert guidance on holiday pay calculations, compliance, and best practices. Our HR specialists can:
- Help you implement rolled up holiday pay correctly
- Ensure your payroll systems align with 2024 regulations
- Advise on best practices for zero-hour contracts
- Provide training for managers on holiday pay compliance
If you need support in managing holiday pay for your workforce, get in touch with The HR Booth today. We’ll help you navigate the changes and stay compliant while keeping your employees engaged and informed.
