The latest changes to holiday pay in the UK and what they mean for employers

In January 2024, the UK government introduced new regulations, The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (Regulations). The headline changes which take effect for holiday years commencing from 1 April 2024 onwards include:

  • Changes to the definition of a week’s pay for holiday pay calculations.
  • Reintroducing the 12.07% of hours worked calculation method for irregular hours and part-year workers.
  • Introducing rolled-up holiday pay for irregular hours and part-year workers.
  • Changes to carry over of holiday rules.

It is important for employers to identify irregular-hours or part-year workers:

  • 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.

Calculation of holiday pay

There are two aspects to holiday entitlement in the UK: (i) four weeks’ leave based on EU law; and (ii) an extra 1.6 weeks’ leave based on UK law. The position for many years now has been that the four weeks’ EU leave must be paid at ‘normal’ pay, whereas employers have been able to pay the additional 1.6 weeks’ leave at basic pay only (for the majority of workers). That has not changed but the government has confirmed the components which must be included when calculating a worker’s ‘normal’ rate of pay for their four week EU entitlement (effectively writing case law into the new legislation).  Those are:

  • payments, including commission payments, intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out;
  • payments relating to 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.

If employers are not yet calculating at least the four weeks EU law on the above basis, they should now address this. (Of course, for the sake of simplicity, many employers do not distinguish between the EU’s four weeks and the UK’s 1.6 weeks for the purposes of calculations, and calculate pay for the entire 5.6 weeks on the above basis. Clearly, if that’s the case there is no need to revisit this, albeit it goes above and beyond the legal minimum).

Holiday accrual for irregular-hours and part-year workers

For workers who are not irregular hours workers or part-year workers, there is no change in how their statutory holiday entitlement is accrued. Otherwise:

  • Pre April 2024 Position

For leave years that begin before 1 April 2024, holiday entitlement will continue to be calculated using the existing method for irregular hours and part-year workers.

  • Post April 2024 Position

For leave years beginning on or after 1 April 2024, holiday entitlement for irregular hours and part-year workers will be calculated as 12.07% of actual hours worked in a pay period. This is a new approach designed to allow annual leave entitlement to be lawfully pro-rated downwards to reflect hours actually worked (contrary to the situation created by the Supreme Court’s recent Harpur Trust decision). It means that irregular hours workers and part year workers will build up holiday entitlement as they work, rather than getting a whole year’s holiday entitlement up front at the beginning of the year.

Note that there are special rules regarding holiday accrual in circumstances of maternity and sick leave.

Permitting rolled-up holiday pay for irregular-hours and part-year workers

The term ‘rolled-up’ holiday pay refers to the practice of paying an employee’s holiday pay at the same time as basic pay (ie ‘rolling’ the two payments together). This system was previously ruled unlawful by the European Court of Justice because of the risk that it would discourage workers from taking time off. Despite this, many employers have continued to roll up holiday pay and this change will therefore be welcome news.

Note that while this practice now be permitted for some, that doesn’t mean workers can work 52 weeks of the year, without taking any holidays; rather, it means leave taken is technically unpaid as holiday pay has been factored in / rolled-up with other pay.

Rolled-up holiday pay will not be mandatory. Employers that do not want to use rolled-up holiday pay for irregular hours and part-year workers can continue to use the existing 52-week reference period to calculate holiday pay. The government has provided guidance on how to use this reference period.

For those employers who do wish to use a rolled-up holiday pay system, they can do so lawfully for leave years beginning on or after 1 April 2024 but only for irregular hours and part-year workers.  Such rolled-up holiday pay will be calculated as 12.07% of a worker’s total pay in a pay period. If employers use this method going forward, holiday pay must be itemised separately on the payslip.

Carry over of leave

EU case law confirms that workers are able to carry forward holidays they have accrued but were unable to take due to being on sick leave or family leave. That is not new but, as with the new legislation’s clarifications on what makes up ‘normal pay’, these case law principles are now being written into UK law. The new Regulations confirm that workers will be able to carry forward:

  • the entirety of their 5.6 weeks’ statutory annual leave entitlement (this is not limited to the four weeks’ EU law leave) into the next holiday year if they can’t take it due to family leave;
  • their four weeks’ EU law leave if they can’t take it because of sick leave (this must, however, be used up within 18 months of the end of the holiday year in which the entitlement originally arose).

In addition, the Regulations state that workers can carry forward untaken holiday if employers don’t recognise their right to paid annual leave or give them a reasonable opportunity to take leave or encourage them to do so; or where they are not warned of the risks of losing their annual leave entitlement at the end of the holiday year. It is important therefore that employers have systems to track leave being taken and ensure they are permitting, and even encouraging, staff to use their annual entitlement, explaining holiday may be lost if not taken.

What now?

The rules apply to leave years which commenced on, or will commence after, 1 April 2024. Accordingly, now is the time for employers to review their practices, particularly ahead of the busy summer holiday season. Please do reach out to our UK Employment team if you require any support.

 

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