Holiday pay law changes for January 2024
Important changes to how holiday pay is calculated are intended to come into force on January 1, 2024.
Last month, the Government published the draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (“ER Regulations”).
Nazia Kausar, solicitor in the employment team at Wake Smith Solicitors, looks at the ER Regulations which are due to apply to holiday years starting on or after April 1, 2024.
This article covers:
Allowing rolled-up holiday pay
New holiday rules for irregular-hours and part-year workers
Who are irregular-hours and part-year workers?
Holiday accrual based on hours worked
Holiday carry-over
Holiday accrual in the first year
Advice on holiday pay
Allowing rolled-up holiday pay
Following the introduction of the WTR 1998, some employers adopted a practice, particularly in respect of casual and hourly-paid workers of "rolling up" holiday pay into the basic rate of pay for work done. This avoided having to pay holiday pay at the time holiday was taken which was held in 2006 to be contrary to EU law, as it could deter workers from actually taking their holiday.
The consultation acknowledged that, in practice, rolled-up holiday is still heavily used in a lot of sectors as a simple way to calculate holiday pay for workers on irregular hours or zero-hours contracts.
Although the government had consulted about the possibility of allowing rolled-up holiday pay in respect of all workers, the government response confirmed its intention to allow rolled-up holiday pay in respect of "irregular-hours workers and part-year workers only".
Rolled-up holiday pay for irregular hours workers and part-year workers will be permitted, calculated on total earnings in the pay period.
Employers will be able to calculate holiday entitlement for irregular hours and part-year workers using an accrual method based on 12.07% of hours worked in the pay period. This provides clarity and considerably reduces the administrative burden on employers that resulted from the UK Supreme Court decision in Harpur Trust v Brazel.
New holiday rules for irregular-hours and part-year workers
The government has decided to make two important changes affecting "irregular hours workers" and "part-year workers".
These workers will be removed from the scope of the existing holiday entitlements.
They will instead be subject to new regulations which will provide:
- A new holiday entitlement, where holiday accrues based on 12.07% of the hours worked in the previous pay period.
- A right for employers (if they choose) to implement a system of rolled up holiday pay, where holiday pay is paid as an uplift of 12.07% to the normal rate of pay at the time work is done, instead of being paid at the time holiday is taken.
- These rules will only apply to irregular hours and part-year workers and only in relation to leave years which start on or after 1 April 2024.
- For any leave year starting before 1 April 2024, the existing entitlements will still apply, subject to the existing rules (including, presumably, the Brazel ruling).
Who are irregular-hours and part-year workers?
Irregular hours workers and part-year workers will now be defined as:
- A worker is an irregular hours worker, in relation to a leave year, if, under the terms of their contract, the number of paid hours that they will work in each pay period during the term of their contract in that year is wholly or mostly variable.
- 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. Periods of sick leave or statutory leave (such as maternity leave) are ignored.
- According to the consultation response, agency workers will be subject to the same criteria. Therefore, they may or may not qualify as part-year or irregular hours workers, depending on the nature of their contract.
Holiday accrual based on hours worked
The original consultation paper had proposed a system where, to avoid the difficulties arising from the Brazel decision, irregular-hours and part-year workers would accrue holiday as a percentage of their average working hours, calculated over a 52-week reference period.
The system actually adopted in the government response is simpler. Holiday entitlement for these workers will be calculated in hours, and will accrue on the last day of each pay period at the rate of 12.07% of the actual hours worked in that pay period. However, an average over a 52-week reference period will still be needed to calculate holiday accrual for workers who are on sick leave or statutory leave (such as maternity leave).
The accrual rate is 12.07% because this is the statutory annual leave entitlement (5.6 weeks) expressed as a percentage of the number of potential working weeks in a year (46.4 weeks).
Regulation 3 of the Regulations provides for this by inserting proposed new regulations 15B-15F into the WTR 1998. These replace the annual leave entitlements under regulation 13 and 13A, which will no longer be applicable to these workers.
A reference period of 52 weeks will be permitted to calculate holiday entitlement for irregular hours and part-year workers who are on long-term sick leave or family leave.
Legislation introduced during the COVID pandemic allowing the rollover of holidays for two holiday years in certain circumstances will be revoked.
The government will legislate to remove these provisions on 1 January 2024, as they are no longer needed. However, workers who still have untaken carried-over holiday under these provisions as at that date will have until 31 March 2024 to use it up
Holiday carry-over
The current right for workers to carry over annual leave where they have been unable to take their leave which has been established through case law has been enshrined in the new ER Regulations.
These will be implemented to provide for a right of carry-over in the following situations:
- Where a worker was unable to take holiday due to being on maternity leave or other statutory leave under Part 8 of the Employment Rights Act 1996.
- Where a worker was unable to take holiday due to sickness.
- Where the employer has failed to recognise a right to holiday, or a right to paid holiday.
- Where the employer has failed to give the worker a reasonable opportunity to take holiday or has failed to encourage them to do so.
- Where the employer fails to inform the worker that holiday not taken will be lost at the end of the leave year.
The current basic (4 weeks) and additional (1.6) annual leave entitlement will not be merged meaning that there will continue to be different methods of calculating pay for these two periods of leave. The basic 4 weeks continue to be paid at ‘normal’ pay and the additional 1.6 weeks will be paid at the basic rate of pay.
Helpfully there will be a statutory definition of what amounts to ‘normal pay’ for the calculation of the basic 4 weeks holiday pay. What must be included when calculating ‘normal’ pay for the purposes of holiday pay has until now been set out in case law.
Under the ER Regulations ‘normal’ pay will be defined in the WRT to include:
- commission payments which are intrinsically linked to the performance of tasks,
- payments for personal or professional status relating to the length of service, seniority or qualification; and
- overtime payments that have regularly been paid to a worker in the 52 weeks preceding the calculation date.
Holiday accrual in the first year
The government had consulted on the idea of changing the rules in regulation 15A of the WTR 1998 relating to holiday accrual in the first year of employment.
However, it has decided that these rules will not change, other than for part-year and irregular-hours workers, who are to be subject to an entirely new system of accrual which will last for the duration of the contract, not just in the first year.
Advice on holiday pay
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Published 15/12/23
