Government to reverse Harpur Trust ruling, and other employment reforms

Earlier this year, the Government consulted on plans to reform employment law in order to “cut red tape for businesses” following the UK’s departure from the EU. The consultation covered:

• Record keeping under the Working Time Regulations (WTR)
• Simplifying annual leave and pay calculations under the WTR
• Consultation requirements under the Transfer of Undertakings (protection of Employment) Regulations (TUPE)
  
  

The Government also consulted on calculating annual leave entitlement for part-year and irregular hours workers.

The Government has now confirmed the employment reforms it plans to take forward in response to these consultations in its Retained EU Employment Law consultation response, which includes, among other things, a reversal of the Supreme Court’s decision in Harpur Trust v Brazel. A draft Statutory Instrument has also been published which is intended to come into force on 1 January 2024 and will bring the changes into effect at various points in 2024. This blog provides a summary of what is changing, with possible next steps for employers.

Rolled up holiday pay

Rolled up holiday is the practice of including an amount for holiday pay on top of a worker’s normal hourly rate, paid at the time they perform the work, rather than when they are on holiday. The practice has been unlawful since the ECJ’s decision in Robinson-Steele in 2006, due to concerns it could disincentivise workers from taking leave. Despite this decision, many employers have continued with the practice on the basis that it was the most practical way of dealing with holiday pay for atypical workers.

To reduce the administrative burden on employers, the Government plans to introduce rolled up holiday pay for irregular hours workers (such as those on zero-hours contracts) and part-year workers only. The practice will not be permitted for workers with regular hours or full year workers.

The Statutory Instrument allows for rolled up holiday pay to be paid by way of a 12.07 per cent uplift to the worker’s remuneration for work done and must be paid at the same time as work done. Calculations will be based on a worker’s total earnings, and so include all types of payments usually included when calculating a week’s pay.

Calculating holiday entitlement for part-year and irregular hour workers

In January 2023, the Government launched a consultation on holiday entitlement and pay following the Supreme Court ruling in Harpur Trust v Brazel. Full details of the consultation and the Supreme Court decision can be found in our blog.

Following this, the Government has confirmed it will introduce a new method of calculating annual leave entitlement for irregular hour workers and part-year workers, which will be based on an accrual method and calculated at 12.07 per cent of hours worked in a pay period. This will reverse the decision in Harpur Trust and return the position on holiday calculations for part-year workers to that in place prior to the Supreme Court decision.

To provide greater clarity, in its draft Statutory Instrument the Government has defined what is meant by:

• Irregular hours worker: a worker whose number of paid hours worked in each pay period is wholly or mostly variable.
• Part-year worker: a worker who is required to work only part of a year, and there are periods within that year of at least a week which they are not required to work and for which they are not paid.
  
  

The Government is not taking forward its proposal to introduce a 52-week reference period. Instead, to give employers flexibility, holiday entitlement will be calculated at the end of each pay period (rather than monthly as the consultation had proposed).

Carry-over of holiday entitlement

The EU Retained Law (Revocation and Reform) Act 2003, although significantly watered down from its original form, will revoke the principle of EU supremacy in UK law from 1 January 2024. This means that UK employment law will no longer need to be interpreted in line with EU law, and it also creates uncertainty over the status of EU case law, since domestic courts will be permitted to depart from it.

To ensure that employment rights in areas potentially affected by this are maintained, the Statutory Instrument restates the current position under EU case law which allows for the carry-over of annual leave when a worker is unable to take it due to being on maternity or other family related leave or sick leave. The Statutory Instrument clarifies that annual leave carried over when someone is on sick leave must be taken within 18 months of the holiday year when it originally arose.

Normal remuneration

Linked to this, the Statutory Instrument clarifies what elements of holiday pay should be included when determining the amount of a week’s pay for the purposes of the WTR (since the current position is based on European case law). It confirms that performance-based commission and regular overtime payments should be included when calculating a week’s pay.

The Government also signalled that it will consider “more fundamental reforms” to the rate of holiday pay in due course.

Single annual leave entitlement

In its consultation, the Government proposed merging the four weeks’ EU derived holiday entitlement with the additional 1.5 weeks provided for under the WTR, so that workers would be entitled to a single pot of statutory annual leave of 5.6 weeks.

The Government has decided not to introduce this change. Instead, it will maintain the two existing rates of holiday pay.

Record keeping requirements under the WTR

European case law currently places a duty on employers to comply with increased record keeping requirements by recording all daily working hours of all workers.

To reduce the administrative burden on employers, the Government will remove the effects of the European judgment and return to the position under the WTR. This will require employers to keep “adequate” records to demonstrate compliance with the WTR. The Health and Safety Executive will publish updated guidance on record keeping requirements when the changes come into effect.

TUPE consultation

Currently, on a TUPE transfer employers must consult with representatives from a trade union or, if there is none, other employee representatives. Employers can only inform and consult directly with employees if they have fewer than 10 employees in the organisation.

The Government will introduce changes to these consultation requirements, so that if there are no existing worker representatives, consultation can take place with employees directly in the event:

• it is a small business (with fewer than 50 employees), or
• a business of any size is undertaking a small transfer (of fewer than 10 employees).
  
  

Where employee representatives (including trade unions) are in place, employers will still be required to consult with them.

Non-compete clauses

At the same time as consulting on these changes, the Government also announced its intention to reform non-compete clauses by limiting their length to three months. No further commentary has been provided about these changes at this time and so the position (and outstanding questions) remain the same as we reported in May see here.

Timing and next steps

For a Government not known for making quick changes in respect of employment law, it is planning a rapid turnaround for these reforms. The draft Statutory Instrument will come into force on 1 January 2024. The changes will then come into effect on the following dates:

• Changes to holiday: will apply to holiday leave years beginning on or after 1 April 2024. For holiday years starting before that date, existing rules will continue to apply.
• Changes to TUPE: will apply to TUPE transfers which take place on or after 1 July 2024. 

This short timeframe is perhaps not surprising: there is a risk that once EU supremacy ends at the end of 2023, courts will be inundated with claims re-litigating principles originally established by EU case law but now under doubt. The Government will want to reduce this risk by providing certainty before EU Supremacy ends. It will also want the changes to be in place before its focus naturally shifts to the next General Election. Although the Statutory Instrument is subject to approval by Parliaments, it is highly likely these changes will come into effect in fairly short order. 

For employers, the most significant impact of these reforms is likely to be in the calculation and administration of holiday pay and entitlement for irregular hours and part-year workers. For those who have not changed their holiday practices to align with the decision in Harpur Trust, and / or currently roll up holiday pay, these reforms will allow for the continuation of these practices from the date of the new legislation without exposure to claims for unpaid (or incorrectly paid) holiday. For employers who made changes to their holiday practices to comply with the decision in Harpur Trust, any proposal to change these arrangements in light of the reforms would need to be carefully reviewed (and advice sought as necessary) before it is implemented in relation to existing employees. For new joiners, there will be greater flexibility over how holiday pay practices can be structured and employers may want to take advantage of that when drafting contracts for new employees. 

Prior to communicating any decision on proposed approach, whether internally or to trade unions, it would be sensible for employers to undertake an audit of their workforce to establish how many employees are affected by the reforms and what current contracts say regarding holiday arrangements. Employers should be mindful when documenting audits that they will not attract legal privilege if they are not conducted in the context of seeking legal advice. Employers may want to consider making changes to such employees’ existing contractual terms and amending provisions of future employment contracts, with the benefit of advice on how to introduce those changes for current staff.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, November 2023