How to calculate and administer holiday pay has raised challenges and concerns for employers for a number of years. The law has been in flux with employers at risk of discovering they are in breach of the law as a result of case law developments, with the most recent being the 2022 Harpur Trust v Brazel case, which deviated from common practice in respect of holiday entitlement for atypical workers.
Some of the uncertainties will hopefully be resolved when the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 come into force. The Regulations are currently in draft but are expected to come into effect on 1 January 2024 and make a number of changes. Some are employee-friendly codifications of existing case law, whereas others present opportunities for employers. These changes are particularly important to understand if you have employees with atypical working patterns or have not updated your holiday pay policies to deal with case law developments that are now being codified.
The key changes are:
- Rolled-up holiday pay will be allowed in certain circumstances
- There will be a clearer definition of what is to be included in "normal remuneration" for the purposes of calculating holiday pay for Working Time Directive holiday entitlement
- An annual leave accrual method of 12.07% of hours worked for irregular hours and part-year workers will be re-introduced
- EU case law permitting carry-over of annual leave where the worker has been on maternity/family-related leave or sick leave will be restated in UK law
- Express carry-forward provisions will be introduced to cover situations such as where an employer fails to give a worker a reasonable opportunity to take holiday in a leave year.
We look at each of these in more detail below. Some of the changes apply from 1 January 2024 and others will only apply to leave years beginning after 1 April 2024. It is important to ensure you are clear on which changes take effect when.
Rolled up holiday pay
"Rolled up holiday pay" is used to describe an approach under which workers receive an additional amount or enhancement to their normal pay and then do not receive any pay when taking holiday. It has been unlawful for some time as a result of case law but some employers have, nevertheless, continued this practice, believing it to be the easiest way of dealing with holiday pay for those with irregular hours where calculating holiday entitlement may be difficult.
The Government recognises that rolled up holiday pay can disincentivise individuals from taking leave but has said that it will permit rolled up holiday pay to be used. This will only apply to irregular hours workers and part-year workers. The definitions of those concepts can be summarised as follows:
- Irregular hours workers – any worker whose number of paid hours in each pay period during the term of their contract in a leave year is, under the terms of the contract, wholly or mostly variable
- Part-year workers – any worker who, under the terms of their contract, is only required to work part of a leave year in circumstances where there is a gap of at least a week in which they are not required to work and are not paid.
The above definitions are technical and workers' contracts will need to be carefully examined to determine if they apply. In particular, there may be some uncertainty over how much variation is necessary for hours to be "mostly variable".
Employers will have the choice between using the existing 52 week holiday pay reference period and rolled up holiday pay. Rolled up holiday pay would be based on total earnings in a pay period.
These changes take effect for employers with leave years commencing after 1 April 2024. Accordingly, employers who operate a calendar year leave year will not be able to take advantage of rolled up holiday until 2025. Additionally, employers will need to consider whether any introduction of rolled up holiday pay would be a contractual change. However, if you are interested in taking advantage of this change, it would be worth starting planning now.
New definition of normal remuneration and what it applies to
In the UK, workers are entitled to 5.6 weeks' holiday. This comprises 4 weeks' Working Time Directive (WTD) holiday and an additional 1.6 weeks' Working Time Regulations (WTR) holiday. The calculation of holiday for each type of leave differs: WTD holiday is to be based on "normal remuneration"; WTR holiday is based on basic pay.
There have been a number of cases over the years on whether bonuses, commission, overtime and other payments should be included in "normal remuneration". With effect from 1 January 2024 "normal remuneration" will be defined as specifically including the following:
- Payments, including commission payments, intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out
- 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.
Although this is intended to provide clarity there remain grounds for uncertainty and challenge, not least in respect of whether payments are "intrinsically linked to the performance of tasks" or have been paid with sufficient regularity. The tribunals and courts will therefore continue to have a role in addressing any residual uncertainty in this respect.
Additionally, employers who do not currently include such payments in holiday pay calculations will need to make a decision on whether to treat the four weeks' WTD leave and 1.6 weeks' WTR leave separately. Our experience is that employers usually want to adopt the same approach for both for simplicity's sake.
Response to Harpur Trust v Brazel
Prior to the Harpur Trust ruling, many employers had calculated holiday entitlement for atypical workers on the basis of 12.07% of hours worked. This reflected guidance that was in place at the time. In the Harpur Trust case, which concerned a term time only worker (but which had much wider application than just term time only workers) the Supreme Court held that this was not the correct method of calculating holiday entitlement and pay. Instead, pay should be based on an averaging method of 52 weeks, even if this meant the worker receiving what might be considered a windfall.
The Government's solution to this is to effectively reinstate the old guidance through legislation. Accordingly, under the new law workers with irregular hours and part-year workers would accrue an annual leave entitlement of 12.07% of hours worked in each pay period (whatever that might be for each employee) in the first year of employment and beyond.
Accrual of annual leave in the first year of employment for other workers will not change – this will continue to be 1/12th of the statutory entitlement on the first day of each month and then pro-rated thereafter.
Employers can, of course, provide a more generous contractual entitlement and give workers a greater entitlement up front.
Similarly to the rolled up holiday pay change, this new accrual method will come into effect for leave years beginning on or after 1 April 2024. Depending on your leave year there may therefore be some time before you are able to take advantage of this change. Additionally, employers who want to take advantage of the change may need to revisit contract drafting if they made changes to accommodate the Harpur Trust v Brazel decision.
Carry-over of annual leave where the worker has been on maternity/family-related leave or sick leave
In order to avoid any risks of uncertainty relating to retained EU law rights post-Brexit, the WTR will be amended to expressly allow for the carry-over of annual leave when a worker is unable to take their leave because of absence due to maternity/family-related leave or sick leave.
Any leave would be lost if not taken within 18 months of the end of the leave year to which it relates. It is helpful to have that set out in UK law as, to date, the carry over period that would be permitted in a claim has depended on an employment tribunal's interpretation of the European case law.
The new Regulations also introduce an annual leave accrual method for workers with irregular hours and part-year workers when they have had periods of maternity/family related leave or sick leave.
New carry forward provisions where employer is in default
One other important change is that the Regulations include a right to carry forward holiday where, in any leave year, an employer fails to:
- Recognise a worker’s right to annual leave under this regulation or to payment for that leave
- Give the worker a reasonable opportunity to take the leave to which the worker is entitled or encourage them to do so, or
- Inform the worker that any leave not taken by the end of the leave year, which cannot be carried forward, will be lost.
Many employers allow employees to carry over a small amount of unused leave in any event (often up to five days). However, this new right gives employees important rights to be able to carry over leave (with no maximum amount) if an employer is at fault for them not taking their leave.
What do employers need to do?
- Assess the composition of their workforce, taking into account the definitions of irregular hours worker and part-year worker
- Review their current arrangements in respect of holiday entitlement and holiday pay applying to each category of worker and seek advice, where appropriate, on whether current arrangements are compliant with the new rules (in particular which payments are taken into account when calculating holiday pay and with the carry over arrangements)
- Ensure they are clear on what changes take effect when
- Consider whether they wish to make changes to their current arrangements
- Seek advice on how to effect (and document) any proposed changes to current arrangements
- If operating different rates of pay for different types of holiday, or if using rolled up holiday pay where permissible, check that systems are in place to ensure compliance and that adequate records are maintained
- Ensure that workers are reminded to take their holiday entitlement and given a reasonable opportunity to do so.
If you have any queries on this article or the new Regulations, please get in touch with the authors or your usual Womble Bond Dickinson contact.