RWK Goodman - Bulletin
Holiday pay and entitlement reforms from 1 January 2024
The legal reforms to holiday pay in England and Wales effective from 1 January 2024 are set to bring about significant changes to the calculation and provision of holiday pay, particularly in respect of atypical and irregular hour workers.
The changes are intended to address the previous unfairness of rules governing holiday pay to ensure that workers receive fair and accurate compensation for their holiday time proportionate to hours worked.
As an employer, it is important to be aware of the legal changes and consider the impact that the new regulations will have on your individual business practices to ensure legal compliance.
What are the changes to holiday pay?
A) Holiday pay must include regular overtime and commission
In England and Wales, employees are entitled to 5.6 weeks’ annual leave which is broken down into two separate holiday entitlements as follows:
4 weeks’ leave based on entitlement under EU law paid at ‘normal pay’
an additional 1.6 weeks’ leave based on UK law at ‘basic pay’
The new regulations ensure that some EU rules on holiday entitlement and pay are retained following the end of EU supremacy over UK law on 31 December 2023. This includes the existence of the two separate pots of holiday outlined above.
Normal Pay
The new regulations codify retained EU and domestic case law in relation to the definition of “normal remuneration” for holiday pay purposes. A week’s pay for holiday under the new regulations now include:
Payments, including commission payments, intrinsically linked to the performance of tasks which a worker is obliged under their contract 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 date.
Basic Pay
The new regulations do not amend the definition of basic pay which is still the worker’s basic remuneration not including any additional payments such as, overtime, bonuses, or commission.
By keeping the two distinct pots of holiday entitlements, the government maintains some of the complexity relating to holiday pay calculations. However, in practice we are seeing most employers taking a pragmatic approach to holiday pay calculations and apply the greater “normal pay” definition to the full 5.6 weeks.
Of course, there are still some employers who have not amended their holiday pay calculations to include commission, bonus, overtime etc for the normal pay element, and these employers continue to risk back pay claims (which can go back 2 years) for miscalculated holidays. Those businesses should seek advice to ensure compliance for the future and reduce risk of claims.
B) New method of calculating holiday pay for part-year/ irregular workers.
The regulations supersede the position under the infamous Harpur Trust v Brazel case, and introduce a new method for calculating holiday pay for workers with variable hours (such as casual workers).
The terms “irregular-hours worker” and “part-year worker” are defined in the regulations and include workers whose hours are irregular (such as casual workers and some agency workers), and workers who under their contract have periods in the year of at least one week where they do not work and are not paid, such as hourly-paid term-time workers.
For leave years starting on or after 1 April 2024, these workers’ holiday entitlements will be calculated in hours rather than weeks and will accrue on the last day of each pay period, at the rate of 12.07% of hours actually worked in that period. This will permit an individual’s entitlement to accrue proportionately throughout the leave year (subject to the maximum entitlement of 5.6 weeks per annum.)
C) Rolled up holiday pay
Rolled-up holiday pay is when an employer pays a worker their holiday pay whilst the worker is working instead of when they are on leave. It is done by adding an extra percentage of pay onto the workers’ basic pay. The process is called “rolled-up holiday pay entitlement.”
Rolled up holiday pay has been unlawful for a number of years. This is because it appears to discourage workers from taking their annual leave. However, from an employer’s perspective, this method is straightforward and involves a simple calculation to determine holiday pay entitlement for those with varying hours.
Under the new rules, an employer is now lawfully able to pay holiday on a “rolled up” basis provided the following circumstances apply:
The worker satisfies the statutory definition of an “irregular hours” or “part-year worker.”
Holiday pay is calculated at 12.07% of all pay for work done.
The additional pay is paid at the same time that the work is done.
Holiday pay is itemised separately on the worker’s payslip.
Calculating holiday pay for irregular hour workers by using the rolled-up method is an option available to employers but it is not mandatory. If an employer does however elect to use this method, it is their duty to ensure that workers are still taking their annual leave entitlement. Alternatively, holiday pay can be paid when holiday is taken, calculated at the rate of a week’s pay for each week’s holiday. A week’s pay will, be the average amount of weekly pay over the previous 52 weeks.
D) Carry-over
The new regulations set out the right for workers to carry over holiday from one leave to the next in some situations:
Where the worker is unable to take some or all of their leave as a result of taking a period of statutory leave (which includes maternity leave and other family-related leave).
Where they are unable to take some or all of their leave as a result of taking a period of sick leave. The carried over leave must be taken within 18 months of the leave year to which it relates.
Where in any leave year, the employer fails to:
Recognise a worker’s right to annual leave or paid annual leave.
Give the worker a reasonable opportunity to take leave or encourage them to do so.
Inform the worker that leave not taken by the end of the leave year will be lost.
In such cases, the right to take the carried-over leave will last until the end of the first full leave year in which there is no such failure by the employer.
E) Removal of COVID-19 carry-over rules
The legislation enabling workers to carry over holiday for two years in certain circumstances were repealed on 1 January 2024. Any accrued holiday carried over under those rules need to be used up by 31 March 2024.
Top tips for employers
Employers will need to review their existing holiday pay practices to ensure that they accurately reflect these changes. This may involve:
Revising employment contracts and holiday policies to reflect the new holiday accrual rules. Note that any changes to the employment contract will require the worker’s agreement.
Carrying out an audit of the employer’s current position to ascertain whether there is a risk of holiday pay previously being miscalculated and identifying any potential claims.
Implementing a system of rolled up holiday pay (in relation to eligible irregular hour workers).
Providing clear guidance to employees in relation to how their holiday pay will be calculated and paid under the new regulations. This should be accompanied with regular reminders to workers to use their holiday entitlement.
Updating payroll systems.