What is Rolled-Up Holiday Pay in the UK And How To Calculate It?
Rolled-up holiday pay is a payment method in the UK in which employees receive an incremental increase to their standard hourly pay in lieu of accrued holiday time. This pay is calculated as a percentage on top of the usual wage to account for holiday entitlement.
Traditionally, the calculation for this increase is set at 12.07% of the hourly rate, reflecting the statutory entitlement of 5.6 weeks of holiday per annum.
In this article, we will examine the concept and nuances of rolled-up holiday pay, including recent legislative changes and how they impact employers and employees.
What Is Rolled-Up Holiday Pay?
Rolled-up holiday pay is a payment method in the context of UK employment. It involves including a worker's statutory holiday pay entitlement within their regular hourly wage rather than paying it separately when they take annual leave.
Historically, the practice has been controversial in the UK. After several legal challenges, the Working Time Regulations 1998 were interpreted to mean that rolled-up holiday pay is not compliant with workers’ rights under EU law. Hence, employers were discouraged from using this model.
However, with legislative reforms, some nuances have arisen. As of 2024, there are conditions under which rolled-up holiday pay can be considered legal, depending on how it is calculated and apportioned.
Calculation
The conventional approach to calculating rolled-up holiday pay is to add a specific percentage to the basic hourly pay rate.
The standard calculation involves increasing the normal pay rate by 12.07%, based on:
5.6 weeks of statutory holiday entitlement
A working year of 52 weeks
Further Reading: Zero Hours Contract Holiday Pay
Implications for Employees and Employers
For workers, this means that their holiday pay is "rolled" into their regular paychecks, providing additional upfront income instead of periodic holiday pay.
Employers must ensure clarity and transparency in how rolled up holiday payments are accounted for to ensure legal compliance and fair treatment of employees.
Is Rolled-Up Holiday Pay Legal in the UK?
Rolled-up holiday pay in the UK traditionally involved adding a percentage to workers’ hourly wage in lieu of actual holiday pay during leave periods. This practice became contentious due to concerns it could deter workers from taking their entitled leave.
Historically, in 2006, the European Court of Justice ruled that this payment method was incompatible with the Working Time Directive, deeming it effectively illegal.
The crux of the issue was that payment for leave must be made at the time when leave is taken to ensure workers are not financially discouraged from actually taking holidays.
Despite this ruling, rolled-up holiday pay persisted in practice across various industries, particularly those employing seasonal or irregular-hour workers.
The UK government's reforms, effective from 1 January 2024, clarified the position and made the practice legal for irregular and part-year workers.
These reforms addressed how holiday pay should be calculated for these types of workers:
Standard Calculation: typically using a 12.07% uplift on hours worked, based on entitlement of 5.6 weeks of holiday.
Pay Period Calculation: Holiday pay is to be paid concurrently with the wages for the work done in the pay period.
When Is Rolled-Up Holiday Pay Typically Used?
Rolled-up holiday pay is commonly utilised when workers have irregular hours or their employment patterns are not fixed, such as seasonal or temp work. Employers opt for this method to simplify the process of managing holiday entitlements for such employees.
In practice, including holiday pay in the hourly rate means workers receive an additional sum on top of their basic pay each time they are paid.
Consequently, holiday pay included in the hourly rate benefits workers by providing a consistent income throughout the year rather than receiving no pay during time off.
However, it's critical to note that employers must clearly break down the hourly rate to show the exact portion representing holiday pay. This transparency enables employees to understand their earnings and the method used to calculate their entitlement.
For roles with a standard hourly rate, the hourly rate, including holiday pay, generally increases by a formulaic percentage. Historically, this percentage has often been 12.07%, correlating with the statutory minimum of 5.6 weeks of annual leave.
Employers must ensure compliance with current legal standards when applying rolled-up holiday pay. Recent legal changes and reforms, effective from January 1, 2024, impact these calculations, mandating that employers must stay vigilant and adapt their practices accordingly.
How Does Rolled-Up Holiday Pay Work in 2024?
In 2024, rolled-up holiday pay is a system where employers include holiday pay as an incremental amount with the regular wages for part-year and irregular-hours workers.
Specifically, the holiday entitlement is calculated and paid out concurrently with the usual salary rather than at the time an employee takes leave.
Businesses generally apply a fixed percentage to the wages to calculate rolled-up holiday pay. The standard percentage used for this purpose is 12.07%, representing the proportion of the holiday entitlement relative to the total working time over a year (5.6 weeks of holiday divided by 46.4 weeks of work).
As an example:
Hourly Wage: £10
Rolled Up Holiday Pay: 12.07% of hourly wage
Total Payment per hour: Hourly Wage + Rolled Up Holiday Pay
Example Calculation: £10 + (12.07% of £10) = £11.207 per hour
Employers must ensure transparency in the rolled-up holiday pay process. This means that payslips should itemise the holiday pay distinctly from the regular wages to prevent confusion. Here's how the payslip can reflect this:
Regular Wages: £400
Rolled Up Holiday Pay (12.07%): £48.28
Total Pay: £448.28
The itemisation also helps avoid payment disputes. It ensures employers adhere to the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, which upholds the utilization of the rolled-up holiday pay method within the legal framework.
Pros and Cons of Additional Holiday Pay
Pros of Additional Holiday Pay
Employee Morale: Greater overall satisfaction among employees who receive additional holiday pay, directly benefiting retention and morale.
Competitiveness: Employers offering enhanced holiday pay can be more attractive in the job market.
Financial Stability for Employees: Additional holiday pay can provide financial stability for employees, as it compensates for the holiday period without financial disruption.
Legal Compliance: In some regions, holiday pay uplift is mandatory, ensuring compliance with local labour laws.
Cons of Additional Holiday Pay:
Operational Costs: Higher costs for employers due to the added expense of holiday pay on payslips.
Complex Payroll: Calculating holiday pay requires more intricate payroll systems and can be complex.
Perceived Inequity: If some employees do not qualify for additional holiday pay, it could lead to unfairness.
Financial Impact: Smaller businesses might find the additional cost of holiday pay challenging for their financial health.
Should Your Business Use the Holiday Uplift Pay?
When considering the adoption of holiday uplift pay, businesses need to assess the benefits and implications for their operations and workforce.
Holiday uplift pay, also known as rolled-up holiday pay or enhanced holiday pay, involves adding a percentage to the workers' hourly wage as a substitute for paid time off.
Keep the following considerations in mind for holiday uplift pay:
Compliance: Ensure any scheme complies with local labor laws and reflects the statutory holiday entitlement.
Transparency: Clearly communicate with employees how their pay is calculated and how the uplift works in practice.
Simplicity: An uplift simplifies the payroll process, removing the need for separate holiday pay calculations.
Further Reading: Holiday Pay When Leaving a Job
How Do You Calculate Holiday Pay per Hour: 5 Tips
Understand Statutory Entitlement
Employees are generally entitled to a minimum of 5.6 weeks of paid holiday annually.
Calculate the equivalent hourly increase by applying the standard 12.07% increase to the hourly rate.Hourly Calculation Method
For hourly employees, holiday pay can be determined by multiplying their regular hourly rate by the total hours worked during the holiday.
If a holiday rate applies, take into account these multipliers.
For example, time and a half would mean multiplying the standard hourly rate by 1.5.Calculate Using Salary for Salaried Employees
Divide the annual salary by 52 weeks to obtain the weekly wage, then break it down to an hourly rate assuming a 40-hour workweek.
Calculate holiday pay based on the hourly equivalent.Incorporate Holiday Premiums
If a policy states a specific holiday premium (e.g., double time), the formula is:
Employee's hourly rate x Holiday premium x Hours worked on the holidayAvoiding 'Rolled-Up' Holiday Pay
It is crucial to process holiday pay in the correct periods.
Adding a compensatory amount to regular paychecks as 'rolled-up' holiday pay can confuse employees and may not comply with employment legislation.
Employers must clearly distinguish holiday pay from regular pay.
Key Takeaways on Rolled-Up Holiday Pay in the UK
In the UK, rolled-up holiday pay is a method where holiday pay is distributed evenly through regular paychecks. This approach allows workers to receive a portion of their holiday pay in their usual wage rather than as a separate payment when they take leave.
New regulations affecting how holiday pay is calculated for those with part-year or irregular working hours will take effect on 1 April 2024. Employers must ensure compliance with these reforms.
Workers are entitled up to 5.6 weeks of paid leave annually. This cap applies to various employment patterns, including those with irregular hours.
FAQs
Does Holiday Entitlement Roll Over in the UK?
In the UK, holiday entitlement does not automatically roll over. Workers are generally expected to use their statutory holiday entitlement within the leave year. However, due to special circumstances, such as the COVID-19 pandemic, there have been instances where rules have been adapted to allow carryovers.
Do Employers Have to Pay Holiday Pay in the UK?
Yes, employers in the UK are legally required to provide holiday pay. Employees are entitled to get paid for their statutory holiday entitlement, which stands at 5.6 weeks of paid leave per year.
Do You Get Taxed on Holiday Pay in the UK?
Holiday pay in the UK is subject to the same taxation rules as regular wages.
This means it is subject to income tax and National Insurance contributions.
Is Holiday Pay the Same as Normal Pay in the UK?
Holiday pay should reflect the same amount an employee would earn during a normal working period.
It can include regular overtime and commission payments that would have otherwise occurred.
What Percentage Is Holiday Pay in the UK?
Standard Hourly Workers: 12.07% of annualised hours
Example Calculation:
Annual Statutory Entitlement: 5.6 weeks
Typical Working Year: 52 weeks - 5.6 weeks = 46.4 weeks
Rolled Up Holiday Pay: Hourly Rate * 12.07%
What Are the Alternatives to Holiday Pay Included in Hourly Rate?
The alternatives to including holiday pay in the hourly rate for UK employees are:
Paying holiday pay at the same time the holiday is taken.
Calculating holiday pay as a week's pay for a week’s holiday based on a 52-week average.
