KNOWLEDGE

Where are we with holiday pay?

Morton Fraser Partner Innes Clark
Author
Innes Clark
Partner
PUBLISHED:
12 February 2024
Audience:
Business
category:
Blog

New regulations came into force on 1 January 2024 and will impact most employers in some way.

What is the starting point on paid holidays?

In the UK, workers are entitled to 5.6 weeks annual leave.  4 of those weeks stem from EU entitlements (“the 4-week entitlement") with the additional 1.6 weeks ("the additional entitlement") deriving from domestic legislation.  Neither Brexit nor The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 ("the 2023 Regulations") change that.  As regards the entitlement to pay during these holidays, currently the 4-week entitlement must be paid at "normal" pay rates.  According to the 2023 Regulations, normal pay (not an expression actually used in the 2023 Regulations) includes: -

•    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.

Whilst this largely preserves the status quo (which was derived from European caselaw), as of 1 January this year, normal pay, which must be paid during the 4-week entitlement, must be calculated in a way that includes the above-mentioned component parts. The additional holiday entitlement need only be paid at the basic rate of pay.  In reality, many employers take a pragmatic view and pay all holidays at the same rate, but they are not legally required to do so.  

What is changing - irregular hour or part-year workers

In terms of key changes that are being made, the first is that "rolled up" holiday pay is going to be allowed in certain circumstances.  Rolled up holiday pay is not a new concept, but it was ruled as unlawful by the European Court of Justice in 2006.  The practice results in workers holiday pay being rolled up into their hourly rate, meaning they are not then paid while they actually take the holiday.

The 2023 Regulations allow for rolled up holiday pay for holiday years from 1 April 2024 but only where the worker is an irregular hour or part-year worker, as defined in the 2023 Regulations (which amend the Working Time Regulations 1998).  For irregular hour or part-year workers whose holiday entitlement is the statutory minimum (5.6 weeks) then the holiday pay must be calculated at 12.07% of all pay for work done, it must be paid at the same time as pay for the work done, and it must be itemised separately on the worker's payslip.  If the holiday entitlement is greater than the statutory minimum, then the 12.07% figure will not be appropriate and the percentage used will need to be calculated by reference to the enhanced holiday entitlement as a percentage of the remaining (non-holiday) weeks of the year.  Payment this way for irregular hour or part-year workers is optional however, so employers are not required to change the way they pay these workers (assuming their existing method is lawful).  Employers that do change to rolled up pay will still be required to ensure that the workers take the full holidays they are due. 

There is also a new accrual system for holiday years from 1 April 2024.  Again, this new system only applies to irregular hour and part-year workers as defined in the legislation.  It is designed to correct the anomaly that arose from the Harpur v Brazel case which observed that the current legislation did not allow leave entitlement to be lawfully pro-rated to reflect hours actually worked.  The new rules mean that irregular hour and part-year workers will accrue annual leave entitlement on the last day of each period at a rate of 12.07% of the number of hours they worked during that pay period.  As with the pay calculation, where the worker is entitled to more than the statutory minimum holiday entitlement the 12.07% figure would not be appropriate and the percentage to be used would have to be calculated separately.  This accrual method also means that these workers will accrue holiday entitlement as they work, rather than starting with an annual entitlement, so it will be up to employers to decide how to manage that - can the worker take more holiday than they have technically accrued for example.

What is changing - all workers

Currently workers are not prevented by statute from carrying forward the additional 1.6-week entitlement to annual leave albeit they would need the agreement of their employer.  Similarly, workers and employers can agree to carry over any entitlement over and above the 5.6 weeks of statutory leave.  However, the Working Time Regulations 1998 requires that the 4-week entitlement be used up in the annual leave year that it is accrued, with some exceptions that have developed from EU case law.  The 2023 Regulations write these exceptions into domestic law for both irregular hour and part-year workers, and all other workers.  These changes to the right to carry forward leave took effect on 1 January 2024.  The circumstances in which leave can be carried forward are as set out below:-  

Reason for carry forward

Maximum amount of leave that can be carried forward

Period within which leave must be taken

Worker unable to take leave by virtue of taking other statutory leave (e.g., maternity leave)

 

Whole 5.6-week entitlement

Within the next holiday year following on from the year the entitlement arose

 

Worker unable to take leave due to ill health absence

 

4-week entitlement for regular workers

 

Whole 5.6-week entitlement for irregular hour or part-year workers

Within 18 months of the end of the holiday year in which the entitlement arose

Employer has failed to (i) recognise the workers right to paid leave; (ii) give the worker a reasonable opportunity to take leave and encouraged them to do so; or (iii) warn worker that untaken leave must be used before the end of the leave year or it will be lost.

 

4 week entitlement

Must be used before the end of the first full leave year in which the employer has not failed to do any of (i),(ii) and/or (iii)

It should be noted that irregular hour or part-year workers can carry forward the whole 5.6-week entitlement if they are unable to take leave due to ill health absence, whereas other workers are only entitled to carry forward the 4-week entitlement.

The 2023 Regulations also bring to an end the right to accrue Covid carry over leave - that is leave accrued because workers could not take it because their work was affected by coronavirus.  Since 1 January 2024, it has no longer been possible to accrue leave for this reason.  Workers can still use the leave accrued prior to 1 January 2024 but must do so before 31 March 2024.

What should employers be doing?

Given that the new rights affect irregular hour or part-year workers differently, employers should satisfy themselves of which category of workers they have.  Current policies should be reviewed and amended, or advice sought on what amendments are required.  Managers should also be reminded of good practices such as ensuring workers are made aware of the need to use their leave within the current leave year.

The UK Government published new guidance - Holiday pay and entitlement reforms from 1 January 2024 - in December 2023 providing practical advice, including worked examples, on the changes made by the 2023 Regulations which employers may find useful.

 

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