Key changes to holiday pay in 2024

In November 2023 the Government announced a host of changes to the current rules surrounding holiday pay, together with draft legislation to implement the changes.

The headline changes which will take effect for holiday years commencing from 1 April 2024 onwards include:

1. Re-introducing rolled-up holiday pay for irregular hours and part-year workers;
2. Re-introducing the 12.07% of hours worked calculation method for irregular hours and part-year workers;
3. Changes to the definition of a week’s pay for holiday pay calculations;
4. Changes to carry over of holiday rules.

These are the most significant changes made to holiday pay rules for some time. The proposed change to permit employers to use rolled-up holiday pay for casual workers will be useful for employers and widely welcomed. Other aspects of the changes, however, are more technical and likely to throw up new challenges and questions for employers.

Due to the potential pitfalls it is important that employers ensure that they are aware of the changes and take steps now to consider how they will implement these.

Summary of key changes to holiday pay

We’ve summarised the key changes below. The Government published initial guidance for employers on these changes on 1 January 2024, including further information relating to the definitions used under the new legislation and worked examples of the calculation methods which employers should also ensure that they review and can be found on the Government’s website.

Background

The wider background to these changes is the Government’s wide scale implementation of a “sunsetting” of EU derived legislation and related case law with effect from 31 December 2023. Legislation introduced earlier this year gave the Government the power to revoke all existing EU derived legislation and related principles with effect from the end of the year, unless it is restated or replaced. As holiday pay is an area which has been heavily influenced by EU law and EU cases, the new legislation is needed to codify various aspects of holiday pay law ahead of the sunsetting of the EU principles and these changes follow a consultation undertaken by the Department of Trade and Industry on holiday pay after Brexit earlier this year.

Alongside these changes, a separate consultation was commenced in January 2023 on calculating holiday entitlement for part-year and irregular hours workers. This followed the decision by the Supreme Court in the Harpur Trust v Brazel case which had concluded part-year workers should still receive full time equivalent holiday entitlement (see our blog Holiday pay following Harpur Trust v Brazel Decision – New legislation from 1 April 2024). These changes are also therefore designed to address the issues caused to employers by the case.

New calculation method for holiday entitlement of 12.07% of hours worked for irregular hours and part-year workers

There will be two key changes affecting “irregular hours workers” and “part-year workers”. New sections will be inserted into the Working Time Regulations 1998 (WTR) dealing specifically with these workers, which will provide:

• A new holiday entitlement system providing that holiday will be accrued based on 12.07% of the hours worked by the individual in the previous pay period;
• The right for employers (if they wish to use it) to implement rolled-up holiday pay. This means that holiday pay for these workers can be 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.

The 12.07% calculation method for holiday entitlement effectively converts the UK statutory holiday entitlement for full time workers of 5.6 weeks holiday (28 days including the 8 public holidays) into a percentage of holiday against working time (5.6 weeks / (52 weeks – 5.6 weeks) = 12.07%).

This calculation method was widely used by employers prior to a series of EU cases ending in the recent Harpur Trust case (see our blog here), which had decided that part-year workers should not have their holiday entitlement pro-rated and therefore should receive the full 5.6 weeks full time entitlement even though they only worked part of the year.

In relation to part-year workers, this change therefore represents a deliberate reversal of the Harper Trust decision confirming that for leave years from 1 April 2024 employers can calculate holiday entitlement for part-time workers on a pro-rata basis using the 12.07% calculation method. The same principles can also now apply to irregular hours workers, again making their holiday entitlement easier to calculate.

Key for employers will be identifying the workers that will fall under these provisions. Under the draft legislation:

• an “irregular hours worker” is someone whose hours in each pay period are wholly or mostly variable under the terms of their contract;
• a “part-year worker” is someone who is only required to work part of the year under their contract and who has periods within the year of at least a week where they are not required to work and are not paid.

It is likely that there will be future legal challenges as to whether individual working arrangements fall within the definition of an “irregular hours worker” once the new rules come into force, for example, where employees work regular hours in some parts of the year, and irregular hours in busier periods.

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. This means that for most workers this can be calculated using this simple method.

Where an individual has periods of absence through the year (for example on maternity leave) and therefore the 12.07% method is not workable, their holiday accrual will instead need to be calculated over a 52 week reference period.

Employers will be able to choose from two systems for paying for this holiday pay – they can pay it when holiday is taken, calculated at the rate of a week’s pay for each week’s holiday as they would regular hours or full year workers, or they can pay this as rolled-up holiday pay as detailed further below.

Change to now allow rolled-up holiday pay for irregular hours and part year workers

Historically many employers preferred practice for casual workers was to “roll up” holiday pay into the basic rate of pay for work done. This was to allow easy calculation and payment of holiday pay for individuals that worked irregular hours and who would not naturally book and take holiday.

A case in 2006 found that the practice of rolled up holiday pay was contrary to EU law as it was paying holiday up front and could deter workers from actually taking holiday and therefore having adequate rest. The Government guidance was changed to reflect the case law over time, and it has been recommended for some time that employers cease to use this practice.

However, the absence of any other easily workable system for casual worker holiday pay, combined with the perception that workers generally were content to receive rolled up holiday pay has meant that many employers were still using this system in practice on a commercial basis.

The Government consultation acknowledged that, in practice, rolled-up holiday is still heavily used in a variety of sectors as a simple way to calculate holiday pay for workers who work irregular hours or zero-hours contracts.

Whilst it has acknowledged the concern that rolled-up holiday pay may disincentivise workers from taking holiday, the consultation says that it believes other safeguards are a proportionate means of addressing these concerns.

The new legislation therefore confirms that for holiday years from 1 April 2024, holiday pay can now be rolled-up for these irregular hours and part year workers only.

If employers elect to pay rolled-up holiday pay they will need to apply an uplift of 12.07% to the workers pay for work done in each pay period. Payments for rolled-up holiday pay should be separately set out on the worker’s payslip and the system of making the payments should be transparent and clear. Again a 52 week averaging system will apply for workers on sick leave or statutory leave such as maternity leave.

It’s important that employers understand that whilst they can pay rolled up holiday pay, they should still also allow these workers the opportunity to use their holiday in practice, notwithstanding the rolled-up payments.

It’s also important to understand rolled-up holiday pay can only be paid for “irregular-hours workers” and “part-year workers only”. Whilst the Government consulted on whether this should be extended to all workers, this was expressly not included in the new legislation.

Changes to the definition of a week’s pay for holiday pay

The other area of contention for holiday pay for some time has been what additional payments holiday pay should include. There have been a series of EU cases as to whether additional payments like regular overtime, commission, bonus and call out or similar payments should be included when calculating holiday pay. The EU case law concluded that holiday pay shouldn’t be calculated on basic pay only, but on the normal pay the worker actually receives.

Again, this case law was followed by changes under UK law which extended the calculation period for holiday pay for employees whose pay varies with the work done or hours worked to 52 weeks- providing that broadly holiday pay should reflect the average hourly rate of pay over the last 12 months.

The new rules aim to restate and codify these principles. Confusingly for employers, however, although holiday pay will no longer be governed by EU rules and principles, the new legislation will continue to differentiate between the 4 weeks’ statutory holiday that the EU laws have historically guaranteed as a minimum holiday entitlement and the extra 1.6 weeks the UK guarantees to workers as a minimum holiday entitlement on top of this (known as regulation 13A holiday).

Under the new rules, there will still be two calculation methods.

Holiday pay for the first 4 weeks of statutory holiday pay (and all holiday pay paid to irregular hours and part-year workers) must be calculated based on new “normal remuneration” provisions. These now specifically list the types of payments that should be included in these calculations.

This effectively re-instates the EU principles derived from a series of case law. Holiday pay should now include under the legislation:

• Payments including commission payments which are intrinsically linked to the performance of tasks which the worker is obliged to carry out under their contract;
• 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 date.

The remaining 1.6 weeks statutory holiday will continue to be subject to the old definition of a week’s pay which is set out under the Employment Rights Act 1996 depending on whether the worker works normal working hours and other factors.

Changes to the right to carry over holiday pay

The rights in relation to carry over of leave from one year to the next will also be codified in UK law. These rights have previously only been set out under EU case law and therefore have been harder for employees to understand and enforce in practice.

Carry over where an employee is unable to take holiday due to family leave or sickness absence

EU case law had provided that where a worker has been unavoidably prevented from taking holiday due to statutory family leave, such as maternity leave, the worker could carry over their holiday entitlement to the next holiday year. This has now been confirmed in the UK legislation which now provides in this situation workers can carry over statutory leave into the following leave year.
The same rules will apply for carry over of leave in the case where an employee has been unable to take leave due to sick leave. This leave can be carried over for a maximum period of 18 months after the holiday year, which broadly reflects the existing EU position.

Carry over where employer has failed to allow holiday to be taken

New rules will also provide that if an employee has not been able to take paid holiday because:

• Their worker status has been denied by the employer (i.e. the employer has incorrectly classed them as self-employed); or
• Their employer has failed to give them reasonable opportunity to take leave or encourage them to do so; or
• Their employer has failed to tell the worker that if they don’t take the leave it will be lost;

they will be entitled to carry over 4 weeks’ holiday per year. This again largely restates the EU position. In all these cases the holiday leave can be carried over every year unless and until the employer corrects the failing.

In practice this means it is more important than ever that employers must:

• ensure that they accurately assess the status of all individuals working for the company;
• ensure that they have systems and documents in place communicating the right to take holiday, encouraging employees to access the same throughout the year and explaining that holiday will be lost if not taken.

Unfortunately the new legislation does not address a number of other matters that were previously set out in the EU legislation and case law, which was perhaps inevitable due to the rushed nature of the decision to repeal all EU legislation and case law with effect from 31 December 2023. It is therefore highly likely that we will see a further series of cases relating to holiday pay going through the UK courts to clarify these grey areas.

If you have any questions about the changes to holiday pay or need assistance in reviewing your current arrangements please contact a member of the Employment team.