Following a series of cases in the Supreme Court and in light of EU law no longer having supremacy over domestic legislation, the Government has taken the opportunity to try to simplify the UK’s domestic legislation relating to holiday entitlement by creating an entirely new system of holiday accrual and holiday pay for part-year and irregular hour workers.

The changes to holiday accrual and pay for these workers take effect for holiday years commencing on or after 1 April 2024. The Government’s guidance on these changes can be found here.

What are the changes?

The Government’s amendments to the Working Time Regulations (WTR), now specifically provide that in calculating holiday pay, employers must include:

  • Payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract.
  • Payments for 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.

Key points to note:

  • For workers with regular working hours, holiday pay based on “normal remuneration” will only apply to  minimum 4 weeks/20 days’ leave each year . Holiday pay the additional 1.6 weeks leave (the bank holidays) may be paid at basic rate of pay.
  • In practice, paying workers different rates for the two different types of leave may be too much of an administrative burden for employers to implement and many may decide to pay all leave at the enhanced rate by reference to “normal remuneration”.
  • Employers wishing to pay different holiday rates for different periods of leave should explain this clearly and consistently to their staff.
  • If employers provide any additional holiday leave entitlement in excess of 5.6 weeks’ then employers should consider the rate of pay applicable to such additional contractual leave and explain this clearly and consistently to the worker.

Rolled-up holiday returns (for some)

In many industries, particularly those involving casual workers, gig-economy workers and those engaging and supplying temporary agency workers, employers have often taken the position that a worker’s entitlement to annual leave was already accounted for by including in their basic rate of pay any annual leave which is accrued, thus “rolling up” holiday pay into basic pay.

Rolled-up holiday pay has typically been calculated at a rate of 12.07% on top of a worker’s hourly wage.

This practice was heavily challenged in courts and ultimately deemed unlawful in 2006 on the basis that paying for holiday in this way defeated the health and safety objective encouraging staff rom taking time off work.

What are the changes?

The Government’s amendments to the WTR, introduced for leave years beginning on or after 1 April 2024, provide that workers with irregular hours and part-year workers will no longer fall within the scope of the current regulations.

Employers will need to apply new regulations which broadly set out that, for these workers, holiday entitlement will accrue at the rate of 12.07% of the hours worked in the previous pay period (being the frequency that the worker is paid; weekly, monthly etc).

The portion attributable to holiday pay must be itemised separately on the payslip to avoid confusion. The holiday pay should be paid at the same time as the worker is paid for the work done in each pay period.

It is not mandatory to pay workers using the rolled-up pay method. Employers may use the existing 52-week reference period method to look back at a worker’s previous 52 paid weeks to calculate what that worker should be paid for a week’s leave and pay at the time that the leave is taken.

If employers intend to start using rolled-up holiday pay, they should check their workers’ contract in case this amounts to a variation of contract.

If using the rolled-up holiday pay method, workers must still be allowed to take their holiday, but will not be paid at the time they take it.

What about agency workers?

Rolled-up holiday pay may only be applied in respect of agency workers if they are an irregular hours worker or part-year worker. Whether they will remain in the scope of the current regulations will depend upon the nature of their contract and hours. If, under the terms of their contract, the hours they will work in each pay period in that year is wholly or mostly variable or there will be periods in the year of at least a week where they are not required to work, the rolled-up holiday pay may be applied to them.

Carry-over of unused holiday

Both EU and domestic case law has developed over the years to allow the carry-over of holiday entitlement not used in a particular holiday year.

The Government’s amendments to the WTR, reflects the the case law that has developed, specifically allowing holiday to be carried over where holiday has not been able to be taken, in the following situations:

  • Sick leave.
  • Where the employer has either failed to give the worker a reasonable opportunity to take the holiday or failed to encourage them to do so or failed to tell them that if not taken, holiday will be lost.
  • Due to statutory maternity or other statutory family leave.
  • Where an employer has failed to correctly recognise a worker’s right to annual leave, for example by miscategorising them as self-employed.

Have the Government’s changes gone far enough?

Although the changes are certainly welcomed and will, in many cases, simplify calculations for employers, there remain areas of uncertainty:

  • There is still some uncertainty around which elements of variable pay should be included in “normal remuneration”.
  • As set out above, the Government has chosen not to combine the 4 weeks and 1.6 weeks’ leave, choosing to keep them as separate entitlements to which differing pay and carry-over entitlements apply. There is further uncertainty following the Supreme Court’s decision in Chief Constable of Northern Ireland v Agnew where the court did not treat the entitlement as two different types of leave.
  • In relation to the new accrual system for irregular hours workers and part-year workers it is unclear how these workers are supposed to book and take time off; by the very nature of this type of working pattern workers are supposed to have the freedom to work as much or as little as they want at times of their choosing.

What should employers do?

The following steps should be undertaken by all employers:

  • Work out if you currently engage any part-year or irregular hours workers.
  • Decide whether you wish to pay rolled-up holiday pay to any such individuals.
  • Undertake all necessary discussions with payroll functions to make sure that your workplace arrangements are ready to administer this new system of accrual and pay.
  • Review any holiday policy in place and make all necessary changes to take account of the new arrangements.
  • Consider whether you need to issue revised terms and conditions of employment to reflect these changes.
  • create a diary reminder of when these changes will come into effect and make sure to work towards making any changes necessary in good time.
  • If you are unsure as to whether you need to implement changes or how you should go about making such changes and bringing them into effect, seek advice.
  • check that the systems you are using allow you to retain adequate records of pay arrangements for compliance purposes.
  • make sure that employees are reminded to take their holiday entitlement on a regular basis and are given reasonable opportunity to do so.

 

26th January 2024

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