Insights

Nighat Sahi

Published 1 May 2024
B0BEFAB3-7AF0-49F8-86B2-AD99CC6EC993
image

A Guide to the Changes to Holiday Pay & Annual Leave

Earlier this year, I wrote about the forthcoming changes to the holiday pay and annual leave rules for part-year and irregular hour workers. Those changes came into force on the 1 April 2024 (some changes came into effect earlier) which means there is now a completely new system in force.

Background

Almost all workers are entitled to 5.6 weeks of paid annual leave each year. This includes agency workers, workers with irregular hours and workers on zero-hours contracts. But a Supreme Court decision in 2022 found that employers should not be (and should not have been) using the 12.07% holiday pay calculation for employees and that part-year workers are entitled to a larger holiday entitlement than part-time workers, who work the same total number of hours across the year. This decision resulted in a Government consultation which in turn resulted in the changes to the regulations that have now come into force.

Summary of the main provisions

Formerly, holiday pay and annual leave for part-year and irregular hour workers was governed by Regulation 13 of the Working Time Regulations 1998. This has now changed and they are governed by Regulation 15B.

The main changes provide:

Re-introduction of rolled-up holiday pay and 12.07% of hours worked calculation method for irregular hours and part-year workers

Rolled-up holiday (historically discouraged by the Government) has continued to be used by a number of employers as a simple way to calculate holiday pay for workers who work irregular hours or zero-hours contracts. The new legislation provides that for holiday years from 1 April 2024, holiday pay can now be rolled-up for these irregular hours and part year workers. However, this only applies to irregular-hours workers and part-year workers only.

If employers pay rolled-up holiday pay, they now need to apply an uplift of 12.07% to the workers’ pay for work done in each pay period. Payments for rolled-up holiday pay should also be separately set out on the worker’s payslip and the system of making the payments should be transparent and clear. A 52-week averaging system will apply for workers on sick leave or statutory leave such as maternity leave.

Changes to the definition of a week’s pay for holiday pay calculations

There have been a number of EU and UK decisions in respect of the definition of a week’s pay for holiday pay calculation purposes, and whether additional payments like regular overtime, commission, bonus and call out payments should be included when calculating holiday pay. This had led to confusion and a lack of clarity.

Under the new rules, holiday pay will no longer be governed by EU rules and principles. However, that said, the new legislation does differentiate between the 4 weeks’ statutory holiday (minimum holiday entitlement under EU law) and the extra 1.6 weeks minimum holiday entitlement (under UK law  and also known as 13A holiday).

The new rules also provide for two calculation methods. Holiday pay for the first 4 weeks of statutory holiday pay (and all holiday pay paid to irregular hours and part-year workers) must be calculated based on new “normal remuneration” provisions which specifically what types of payments should be included in the calculation, namely:

  • Payments including commission payments intrinsically linked to the performance of tasks which the worker is obliged to carry out under their contract
  • Payments for professional or personal status relating to length of service, seniority or professional qualifications
  • Payments such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date

The 1.6 weeks statutory holiday will continue to be subject to the old definition of a week’s pay which is set out under the Employment Rights Act 1996 depending on whether the worker works normal working hours and various other factors.

Changes to carry over of holiday rules

 Where an employee is unable to take holiday due to family leave or sickness absence (i.e. statutory family leave, such as maternity leave) the workers can now carry over statutory leave into the following leave year.

Where an employer has failed to allow holiday to be taken either because they don’t accept someone’s worker status or because the employer has failed to give them reasonable opportunity to take leave, failed to encourage them to do so or the employer has failed to tell the worker that if they don’t take the leave it will be lost, the worker will be entitled to carry over 4 weeks’ holiday per year.

What action you need to take

If you haven’t already, as an employer, you now need to urgently do the following:

  • Assess the status of your employees and establish whether you employ any part-year or irregular hours workers.

An irregular hours worker is someone whose hours in each pay period are wholly or mostly variable under the terms of their contract.

A part-year worker is someone who is only required to work part of the year under their contract and who has periods within the year of at least a week where they are not required to work and are not paid.

  • Decide whether you are going to pay any qualifying employees rolled-up holiday pay.  You can choose between paying it when holiday is taken, calculated at the rate of a week’s pay for each week’s holiday as you would regular hours or full year workers. Or you can pay as rolled-up holiday pay as described.
  • Review your employee communications to ensure that you clearly inform employees of their right to take holiday, encourage them to take holiday and explain that holiday will be lost if not taken.
  • Review your payroll functions to make sure you can administer the new rules of accrual and pay. 
  • Review your holiday policy and your employment contracts and make changes as necessary.

If you would like advice about the implications of the news rules and how they affect you, please get in touch.

The legal content provided by RSW Law Limited is for information purposes only and should not be relied on in any specific case without legal or other professional advice.

Copyright is owned by RSW Law Limited and all rights in such copyright are reserved. Material is not to be reproduced in whole or in part without prior written consent.