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To coin a phrase: “Yeah but no but yeah but no but yeah…”   And that just about sums up the legal position, which is why so many employers are confused.

By virtue of the European Working Time Directive, all workers (including temporary and those with irregular hours) are entitled to 4.8 weeks (24 days) of paid leave every year including bank  holidays.  This will increase to 5.6 weeks or 28 days (from 1st April 2009 in the UK).
Temporary workers and workers with irregular hours accrue holiday on a pro rata basis.  The Working Time Regulations state that entitlement to leave may not be replaced by payment in lieu. It is therefore unlawful to pay workers instead of allowing them to take holiday.

Under a rolled up holiday pay scheme, workers are paid an enhanced hourly rate which incorporates their entitlement to holiday pay, but they do not lose their right to take leave. They accrue holiday in the normal way and are entitled to take it. However, since their normal hourly rate has already compensated them for their entitlement to holiday pay, they are not paid for the leave at the time the leave is taken.

In 2004 the European Court of Justice ruled that such schemes are unlawful and said that EU countries should take steps to ensure that they are discontinued.  However it also said that employers could set off against holiday pay any rolled up amounts paid, provided that the scheme was sufficiently transparent.

What does “transparent” mean?  A recent tribunal decision suggests this may include express agreement to rolled up holiday pay in the employment contract, clearly stating the holiday pay in the payslip, keeping holiday records and making genuine efforts to ensure holiday is taken.

Yeah but no but…
   So what’s the problem?  Well, it’s twofold.  First, if the scheme isn’t sufficiently transparent an employer does risk being forced to pay holiday pay twice.  Secondly, the EU decision was clear that schemes should be discontinued.  Legislation to this effect is widely expected in due course.

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