What is ‘rolled up holiday pay’ and should we be using it in the UK?

You may not be familiar with the term, as ‘rolled up holiday pay’ (or RUHP) had been illegal in the UK since 2006. But since the new 2023 Employment Act came into force at the start of this year, it’s legal again – so what exactly is it, and should employers be using it?

Table of Contents

• What is rolled up holiday pay?
• Why was rolled up holiday pay made illegal?
• What’s so bad about that?
• So what’s changed?
• Can be it be used fairly and ethically?
• Key takeaways

What is rolled up holiday pay?

Rolled up holiday pay is where, instead of taking paid annual leave in the form of days off, the monetary value of this holiday is calculated and added onto (or ‘rolled up’ with) your basic pay. So instead of paid leave, you get the cash equivalent. Typically, this is translated into a higher hourly rate.

To calculate RUHP, you need to work out a percentage increase to the standard hourly rate that accounts for the holiday entitlement that all employees get. In the case of the statutory annual leave allowance of 5.6 weeks of holiday a year, you would need to apply a 12.07% bump to the hourly rate. The regulation further clarifies how and when holiday pay should be paid – concurrently with wages for that pay period. In this sense, it is still being ‘accrued’ with hours/days worked.

Why was rolled up holiday pay made illegal?

In the past, some employers were using rolled up holiday pay to add a ‘premium’ to wages if paid holiday time wasn’t taken. Essentially, it was a financial incentive to not take your leave allowance. The practice was challenged in multiple cases, and the issue ended up at the European Court of Justice. The Court ultimately found that rolled up holiday pay contravened the article 7 of the Working Time Regulations of 1998, which states that annual leave must be taken and cannot be ‘paid in lieu’ unless and until the employment contract ends. As such, rolled up holiday pay was considered to be non-compliant (under EU law) with workers’ rights, making it effectively illegal.

What’s so bad about that?

It might sound on the surface like making an employment benefit or perk optional gives more choice and flexibility to workers – which is a good thing, right? Well, to an extent. But holiday pay is not a ‘perk’, it’s a right. It’s a right that is enshrined in law, and for good reason – it is not a ‘nice to have’, but a ‘need to have’.

Employment laws are there to prevent unfair, unsafe and unhealthy practices and treating paid holiday as optional and effectively trying to bribe people into not using it, is both unfair and unhealthy. We have to remember we are people, not robots; you can’t just switch us off and on as needed at the start and end of shifts, we need to rest and recuperate and live a life outside of work.

Paid time off shouldn’t be a luxury available only to those who can afford to slow down and take a break. If you’re struggling to pay the rent or mortgage, working every hour under the sun, and your boss tells you that you can get paid more if you don’t take holiday, it’s easy to see how that would be tempting. But at what cost? Those under financial strain would be more likely to take up the offer of extra upfront income instead of time off, when arguably they are the ones who most need to slow down and catch a breath. It’s effectively a form of paid, or incentivised, presenteeism – and we know what a negative impact this has on productivity. This widens the inequality gap between them and their better-off colleagues, adding a health and wellbeing dimension into the mix.

Defenders of prior forms of rolled up holiday pay would say you’re getting the same value from holiday pay upfront as you do from paid time off, that nobody is losing out. But that’s only true if you value holiday in purely financial, monetary terms. We know that paid leave is about so much more than that – it’s a mental break, freedom, choice, time to spend as you please. All these things are essential for health and wellbeing and should not be cast as an optional luxury.

No one should ever feel guilty about needing to rest or ashamed of wanting a break, and the right to paid leave as standard reflects this truth.

So what’s changed?

Despite being essentially illegal before this year, in practice rolled up holiday pay had been in consistent use across many industries in the UK, particularly those that employ casual or seasonal workers. So it was still occurring, but with no regulation as it was not recognised as a permitted practice and so assumed to not be happening.

Recent legislative reform has introduced new nuances that mean rolled up holiday pay can be legally used in some contexts and conditions. In this sense, the reforms have not reintroduced this practice but added clarity on how it can be used and made it legal in specific cases – chiefly, for irregular and seasonal work.

Can be it be used fairly and ethically?

The legalisation of rolled up holiday pay comes in the context of a whole host of new employment laws and regulations designed to protect workers from exploitation and unfair practices. This should mean that the benefits of these kinds of flexible work contracts can be realised without the risks that were there previously and that created inequality (financial and job security) between contracted and non- (or non-standard) contracted workers (eg zero hours, freelancers, casual contracts).

These people are more at risk of being exploited or of not receiving the employment benefits that others in more traditional work contexts take for granted. Rolled up holiday pay simplifies the process of managing holiday pay for these workers, making it more likely to actually be given. As such, its legalisation in the contexts in which it logically applies, is a step forward. The alternative of ‘no you can’t do this’, means these workers get nothing – when they’re not working, they’re not earning.

The crux of the issue lies in the separation of holiday pay from holiday itself. For those only working part of the year, or for short periods, this is not so problematic. In fact, if they’re on a short-term contract they may not be working for a long enough period that they would even want or need a holiday, especially if they know it’s going to be followed by a period out of work when they can catch up on rest and ‘life stuff’.

For full-time employees, of course, this is not the case. They should be taking regular, paid breaks throughout the year, and rolled up holiday pay does nothing to support this – it only provides a reason not to take time off. Like a pay day loan, this is a temptation that can lead people down a slippery slope that ends in burn out. In those contexts, it shouldn’t be there.

Fortunately, employers are also much wiser now in regard to recognising the link between mental and physical wellbeing and productivity and absenteeism Using rolled up holiday pay to try and entice people to work beyond what is reasonable and sustainable is likely to result in a higher number of sick days among those staff. It’s simply not healthy, nor feasible in the long-term, to forgo time off. In this sense, it’s a false economy, and savvy employers will easily recognise this.

Key takeaways

Rolled up holiday pay is only controversial in its misuse. In and of itself, it’s a way to ensure casual and seasonal workers get what they are legally entitled to in terms of holiday pay, and aren’t short-changed simply due to their short contracts. They have the same right to paid time off as any other worker, and successive seasonal or short term arrangements that don’t use rolled up holiday pay results in all those periods of non-work between contracts (their equivalent of holiday) being unpaid. A bit unfair, no? For these people, rolled up holiday pay is a lifeline – a bit of extra pay that, if they chose, they could put aside to cover time not spent in work.

The problem comes in when it is not used in the spirit in which it is intended, and this remains illegal. It cannot be used as a way to incentivise people to forgo time off. Full-time employees on permanent, year-round contracts, should not be receiving – or even offered – rolled up holiday pay.

The legalisation makes it clear that rolled up holiday pay should be given under certain conditions, and provides a framework for calculating and paying it. In that sense, it is a step forward in putting employees of all kinds on an equal footing and ensuring that a healthy work-life balance is available to all.

If you run a business that hires seasonal or casual staff, you should definitely be thinking about rolled up holiday pay. If this isn’t you, stick to your usual annual leave policy and ramp up your efforts to ensure that leave calendar is full – happy and healthy employees will always deliver the best results and save you money in the long-term.