Changes in Holiday Pay
Calculating overtime, holiday pay and entitlement can be complex. The main pieces of legislation that govern this are the Working Time Regulations 1998 and the Employment Rights Act 1996. However, in the last few years case law has played its part in determining what should be included in the holiday pay calculation. This can make it even more challenging for employers to ensure they are compliant.
Background to Holiday Pay and Entitlement
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.
Holiday leave rights for casual workers / zero-hour contracts
In July 2022, the Supreme Court handed down its judgment on Harpur Trust v Brazel. The judgment held that the correct interpretation of the Working Time Regulations 1998 is that holiday entitlement for part-year workers should not be pro-rated so that it is proportionate to the amount of work that they actually perform each year. Part-year workers are entitled to 5.6 weeks of statutory annual leave calculated using a holiday entitlement reference period to determine their average weekly pay, ignoring any weeks in which they did not work.
The impact of this case is that employers should not be (and should not have been) using the 12.07% holiday pay calculation for employees, which has been common practice for those on zero-hours contracts.
A second consequence of this judgment means that part-year workers are now entitled to a larger holiday entitlement than part-time workers, who work the same total number of hours across the year.
Government consultation: calculating holiday entitlement for part-year and irregular hours workers
As a result, the government launched a consultation last year, the outcome of which was published in November 2023 and resulted in new rules that set out the way in which holiday pay is to be calculated for irregular hours and part-year workers (such as those who work only during term time). This was the second recent government consultation in this area.
The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023
Most of the new rules provided for in The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 are due to come into force from 1 January 2024, but some rules are not applicable until 1 April 2024. The legislation is still in draft form, but no major changes are now expected. The main provisions of the new rules are as follows:
Workers with irregular hours or who only work part of the year
There will be a new method of holiday accrual for irregular hours workers and part-year workers. Employers will either be able to pay holiday pay when the holiday is taken or pay rolled up holiday pay.
Paying holiday pay when holiday taken
This will be calculated at the rate of a week’s pay for each week taken, a week’s pay being the average weekly pay over the previous 52 weeks.
Rolled up holiday pay
Rolled up holiday pay will allow the employer to make an additional payment in each regular payslip rather than pay holiday pay when the holiday is taken. This will be calculated as an additional 12.07% on top of the worker’s remuneration for work done in each pay period. There will be a 52-week averaging system to calculate rolled-up holiday pay for workers on sick or statutory leave.
Workers will also have the right to carry over holiday from one year to the next if certain conditions are met, namely where the worker cannot take some or all of their leave because they have taken statutory leave or due to ill health. Carry over will also be possible where an employer fails to recognise a worker’s right to leave or fails to give the worker reasonable opportunity to take leave and fails to inform the worker that leave not taken by the end of the leave year will be lost.
Defining an irregular hours worker
The new regulations define someone as an irregular hours worker if, in a holiday year, the number of paid hours they work in each pay period during the term of their contract is (under the terms of their contract) wholly or mostly variable. This may include some agency workers, variable hours workers and zero hours workers.
Defining a part year worker
A part year worker will be someone who in a holiday year, is only required to work part of the year under the terms of their contract and there are periods within that year (during the term of their contract) of at least a week which they are not required to work and are not paid for. This may include some seasonal workers and term time only workers.
Holiday pay clarification
The regulations clarify that from 1 January 2024 holiday pay for the four weeks of ‘EU’ derived holiday only, will include:
- Payments intrinsically linked to the performance of tasks that a worker is contractually obliged to carry out, such as commission;
- 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.
The rules also confirm that payment for the additional holiday entitlement of 1.6 weeks will continue to be based on basic pay only (unless the employer opts to pay the same rate in respect of the full statutory holiday entitlement).
Restating existing law
The new regulations will also restate some existing working time requirements that derive from EU case law, including defining normal pay used to calculate holiday pay.
There has been some negative press concerning the changes with The Guardian estimating that “5 million British workers on temporary or irregular contracts will have to gradually gain [full holiday rights] during the year” and quoting the changes as the “most significant erosions of employment protections since the UK left the EU working time directive”. It’s also of note that the European Court of Justice ruled rolled over holiday pay as unlawful because it discourages workers from taking holiday.
Regardless of the merits, employers will certainly need to make sure they understand the changes and their full implications. Employers should now review their employment contracts particularly in respect of part-year and irregular hours workers. Contracts will need to be amended to reflect the new rules, and consideration will need to be given to whether to use rolled up holiday pay.
If the findings of the new regulations may affect you or you would like advice and assistance in relation to an employment or workers situation, 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.