Holiday reforms Q&A: your questions answered
Insight
The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations (the Regulations) came into force on 1 January 2024, paving the way for reforms of holiday entitlement and holiday pay calculations in the Working Time Regulations.
Here we answer some of the questions we are being asked about these reforms to help employers understand the impact of the changes that have already come into effect and prepare for those still to come.
What is changing?
For a summary of the main changes being introduced, see our blog Government to reverse Harpur Trust ruling.
New rules about carryover of holiday entitlement and what to include in holiday pay have now come into effect (as of 1 January 2024) and are discussed in more detail below.
In addition, employers will have the option to calculate holiday pay and entitlement in two new ways for part-year and irregular hours workers only (as defined in the legislation):
- A new accrual method will be introduced, under which holiday entitlement will be calculated as 12.07 per cent of actual hours worked in a pay period (defined as how frequently a worker gets paid).
- Rolled up holiday will be permitted, allowing employers to include an additional amount of pay with every payslip to cover a worker’s holiday pay, instead of paying holiday pay when a worker takes annual leave. The calculation will be 12.07 per cent of a worker’s total pay in a pay period.
These changes come into effect for holiday years starting on or after 1 April 2024. For employers with holiday years starting before that date, the existing rules will continue to apply until the start of their next holiday year (potentially as late as March 2025).
What guidance is available?
On 1 January 2024, the Government published guidance on Holiday pay and entitlement reforms. The guidance is not legally binding and the Government acknowledges it “does not provide definitive answers”, but it is likely the courts will have regard to it in cases relating to the holiday reforms. In the main the guidance contains illustrative pay calculations in respect of holiday accrual and carry-over. However, some of the examples impact on our understanding of when the Regulations will apply, as explained below.
The Government’s Retained EU Employment Law consultation response also contains useful background details about the Government’s rationale for introducing the changes.
Interpretating the definitions of part-year worker and irregular hours worker
Part-year worker: what is the position for a part-year worker whose pay is annualised (ie they are paid in twelve equal monthly instalments)?
A worker is a part-year worker, in relation to a leave year, if, under the terms of their contract, they are required to work only part of that year and there are periods within that year (during the term of the contract) of at least a week which they are not required to work and for which they are not paid.
It was generally assumed that when the Supreme Court referred to "part-year workers" in Harpur Trust v Brazel (the decision which prompted some of these reforms), it included all individuals who were engaged to work part of the year, including those with annualised pay where the worker genuinely only worked part of the year but was paid in equal instalments for administrative convenience.
However, the following example in the new guidance casts doubt on whether a part-year worker with annualised pay will be classified as a part-year worker under the new Regulations:
Ian, who is paid an annualised (flat) salary over 12 months but has periods of time that last more than one week where he is not working.
Ian would not qualify as part-year worker if his contract reflects that there are weeks where he is not working and there are no weeks where he does not receive pay. (Ian would need to not receive pay during the periods he is not working, in order to be classified as a part-year worker).
The effect of an individual not meeting the definition of a part-year worker under the Regulations is that it will not be possible for an employer to take advantage of the new rules outlined above, namely paying rolled-up holiday pay and / or using the 12.07 per cent accrual method of calculation. Instead, the worker will continue to be entitled to 5.6 weeks’ paid holiday irrespective of what proportion of the year they work.
This is potentially problematic for organisations who annualise pay for their part-year workers, especially as we are unlikely to have further clarity on the point unless and until it emerges via case law. In the meantime, we recommend conducting an internal audit to assess how many individuals in your organisation are affected by this issue. We are happy to provide specific advice on the possible options available to your organisation.
Irregular hours worker: if someone has regular core hours but works irregular hours over and above that, will they be an irregular hours worker?
A worker is an irregular hours worker, in relation to a leave year, if the number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable.
If someone works a different number of hours each week, they will clearly qualify as an irregular hours worker. In contrast, the guidance makes it clear that someone on a rotating shift pattern eg regular hours which rotate over two weeks, will not be an irregular hours worker. The guidance gives the example of “Paul”, who works 15 hours in week one and 20 hours in week two and doesn’t work overtime. As his contracted hours are fixed during both weeks, he does not qualify.
What the guidance doesn’t clarify though is the grey area in between these two examples, and in particular where to draw the line when it comes to establishing what is “mostly” variable. For example, what about a worker whose core hours are fixed, but who works ad hoc overtime hours on a regular basis? Or workers whose hours are variable most of the year, but have one pay period where their hours are regular? Again, these questions and the nuance of the definition is something that we may only see clarified by the courts in due course. In the meantime, it will be important for employers to carry out a careful analysis of the contractual terms of affected workers on a case-by-case basis in order to determine whether they meet the definition.
Rolled-up holiday pay
Is rolled-up holiday pay now lawful for everyone?
Not for everyone. Rolled-up holiday pay will only be lawful for part-year and irregular hours workers who meet the definitions in the Regulations, and only for holiday years from 1 April 2024. Employers cannot use it for anyone who does not meet the definition for either of these categories (to do so could bring a risk of an unlawful deduction from wages claim).
Must workers still be given time off if we are rolling-up their holiday pay?
Yes. Under UK holiday provisions, a distinction needs to be drawn between entitlement to leave and holiday pay. Workers are entitled to both time away from work as holiday and pay for that time away.
In respect of the rolled-up holiday provisions, this means a worker is entitled to:
- Pay: an uplift of 12.07 per cent to the worker’s remuneration for work done in each pay period, paid at same time as the worker is paid for work done in that pay period.
- Entitlement to leave: in addition, a worker must also be given time off. They will not be paid at the time they take that holiday though, since payment will already have been paid on a rolled-up basis.
Carry-over of holiday entitlement
What are the carry-over provisions relating to maternity / family leave or sick leave?
The Regulations set out that from 1 January 2024, workers are allowed to carry over unused holiday entitlement in the following circumstances:
- A worker who has been on maternity or other family related leave can carry over up to 5.6 weeks.
- A worker who has been on sick leave can carry over up to four weeks, provided it is used within 18 months from the end of the leave year in which it accrued.
These provisions are a reiteration of existing case law and so will be familiar to employers.
When can an employer’s failures regarding annual leave result in a carry-over entitlement and why is it significant?
Up to four weeks of annual leave may be carried over where an employer fails to:
- Recognise a worker’s right to annual leave or pay. This will cover cases where an employer has misclassified someone as self-employed.
- Give the worker a reasonable opportunity to take leave or fails to encourage them to do so.
- Inform the worker that leave not taken by the end of the leave year will be lost.
By putting the duty to inform and encourage workers to take leave on a legislative footing, employers are now under a positive duty to proactively ensure workers have an opportunity to take annual leave.
This is significant because any of the failures above will allow a worker to carry over up to four weeks’ annual leave entitlement not only into the next leave year, but indefinitely until termination. At that point, they will be entitled to a payment in lieu of all their accrued annual leave entitlement. If the worker has been engaged for a considerable length of time, this could add up to a significant amount.
The Regulations do provide employers with an opportunity to extinguish the risk of a claim by correcting any failings. Holiday carried over in the circumstances set out above cannot be carried forward beyond the end of the first full year in which there is no failure by the employer.
Given the risks involved, employers are advised to put systems in place to monitor and encourage the taking of annual leave, and to inform employees about the risks of leave being lost if they do not take it.
Rates of holiday pay
What must be included when calculating holiday pay?
The Government has decided to keep two distinct pots of statutory holiday entitlement, which attract different rates of pay. From 1 January 2024:
- The first four weeks: must be paid at a worker’s "normal" rate of pay, and must include:
- Payments, including commission payments, intrinsically lined to the performance of tasks which a worker is contractually obliged to carry out.
- Payments relating to professional or personal status relating to length of service, seniority or professional qualifications.
- Other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.
- The additional 1.6 weeks: can be paid at a worker’s "basic" rate of pay and does not need to include the payments above.
Many employers choose not to distinguish between the two pots of leave. In this case, it is important that all holiday entitlement is paid at the "normal" rate of pay to avoid an underpayment.
Under the new payment methods for part-year and irregular hours workers, these workers must have all of their statutory holiday entitlement paid at a rate based on their ‘normal’ pay, and so the distinction between these two pots of leave will not be relevant.
Could annual bonuses now fall to be included in the calculation of holiday pay?
There has been some discussion among commentators that the requirement for "normal" pay to include "payments intrinsically linked to performance under a contract" could potentially include irregular payments such as annual performance-related bonuses.
This would be a significant, and for employers an expensive, departure from current practice and does not appear to be the Government’s intention (the guidance talks of “regular bonuses” and workers receiving the same holiday pay as the pay they receive when working). However, the Regulations are unclear and, where there is ambiguity in legislation, litigation often follows. This could therefore be an issue we see scrutinised by the courts in time to come.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2024
