Businesses warned 'cash in lieu' of holidays is invalid

Businesses warned 'cash in lieu' of holidays is invalid

Beach - Central Audiovisual Library, European CommissionThe Employment Appeal Tribunal (EAT) has been in holiday mood or to be precise, taking a closer look at 'rolled-up' holiday pay issues. Every employer should become familiar with their conclusions, says Alan Lewis, an employment law specialist at Manchester's George Davies Solicitors.

His plain language interpretation of their decision is as follows:

The court considered the legality of a series of five cases and decided that three types of arrangement were void:

  • Employment contracts which made no reference to holiday pay.

  • Agreements which appear to exclude any liability for holiday pay.

  • Contracts where pay rates are said to include an amount for holiday pay but give no specific indication of the amount.

Two types of agreement will stand up in court:

  • Contracts which clearly state a rate of pay topped-up by a specific sum or percentage as holiday pay, and

  • Contracts where holiday pay is paid, pro rata, immediately before or after specific holiday periods.

"The EAT also gave employers, employees and trade unions guidance for the future on the subject of making payment in lieu of holidays. Any such agreement is void - in other words, not illegal but unenforceable in law."

"Put another way, an employer could undertake to make and, indeed, make a payment to an employee 'in lieu of holiday'. The worker could pocket the money and then take the statutory amount of time-off anyway. The employer would have no recourse in law," Lewis warns.

What the EAT guidance also indicates is that:

  • Any 'rolled-up' holiday pay agreement must be expressly agreed, in other words, incorporated into an individual's contract of employment.

  • The amount or percentage of holiday pay must be clearly stated in an employee's contract and also, preferably, on their payslip.

  • The holiday pay must be a true addition to the contractual rate of pay.

  • Records of holidays must be kept.

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

"Most employers know that their workers have a statutory entitlement to paid holidays each year," says Lewis. "This EAT decision plainly invalidates any clause in an employment contract that may have been included in a deliberate attempt to erode these rights in any way. It puts the onus on employers to be completely transparent in holiday pay dealings."

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