There are new regulations on statutory paid holiday rights for workers, which took effect on 1 January 2024 and 1 April 2024.
The rules on statutory paid holiday have rarely stood still for long and it has been difficult for many employers to keep up with how to calculate the correct amount of accrued holiday entitlement and holiday payment rate accurately. These reforms are intended to make dealing with annual leave more straightforward for employers than it has been. Time will tell whether this objective has been achieved!
Why is holiday accrual and pay being reformed?
The background to these changes include the widely reported case law decision of Harper Trust v Brazel where the Supreme Court rejected the approach adopted by many employers of calculating accrued holiday entitlement, in particular for part year and irregular hours workers, at a rate of 12.07% of the hours worked. Instead we were told the correct approach was that such workers should receive 5.6 weeks of annual leave per year, not a pro rated amount of holiday and that holiday pay should be calculated based on an average of their previously worked earnings. See our previous article for further detail.
This court decision led to employers being legally required to pay higher amounts of holiday pay which were disproportionate to the number of hours worked by certain workers. In response the Government stepped in and launched two consultations to review paid holiday rights. The conclusion of the consultation was new regulations on holiday pay with changes that took effect from 1 January 2024 and 1 April 2024.
This article sets out a brief summary of the changes.
Holiday pay confirmed to include commission and overtime
It is well established that workers in the UK are entitled to 5.6 weeks of paid holiday (pro rated if working part-time). This has been divided into two notional pots – (i) four weeks’ leave based on EU law (under the original European Working Time Directive) and (ii) an additional 1.6 weeks based on UK law. Under EU case law the four weeks of leave had to be paid at a rate of ‘normal pay’ meaning that this would include variable payments such as commission and overtime. However, the additional 1.6 weeks could be paid at a rate of basic pay.
The new regulations have effectively written EU case law into the UK legislation, so it was confirmed that from 1 January 2024, the four weeks’ EU holiday pay entitlement (and 5.6 weeks for irregular hours and part-year workers) should include:
- 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; and
- Other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.
In our experience it is not uncommon for employers to pay annual leave at a rate of basic pay, although this has been confirmed as being unlawful for some time, rather than including variable payments such as commission and overtime. These changes give an opportunity for employers to review their practices on paid holiday and correct their position going forwards, which may entail making back payments of underpaid holiday to staff.
Rolled up holiday pay
From 1 April 2024, the new regime gives employers the option of paying rolled up holiday pay, but only to irregular hours workers and part year workers (see the relevant definitions below). Note that employers can still utilise the usual method of paying holiday pay, i.e. when the relevant period of annual leave is taken, which applies to all workers.
Rolled up holiday pay is the practice of paying a worker’s holiday pay at the same time as their basic pay. Many employers have used this practice often as pragmatic solution when employing irregular and casual staff, although it was ruled as unlawful in 2006 by the European Court of Justice in the case of Robinson-Steele v RD Retail Services on the basis it may deter workers from taking paid holiday.
The new rules on holiday pay have now deemed rolled up holiday pay to be lawful for irregular hours workers and part year workers, subject to employers:
- Calculating it an additional rate of 12.07% of all pay for the work carried out;
- The additional 12.07% must be paid at the same time as ordinary pay for work done; and
- The rolled up holiday pay must be itemised on the payslip.
Note that if a worker has a holiday year that started before 1 April 2024, the practice of rolled up holiday pay will not apply to them until the next anniversary of their holiday year. For example, if a worker has a holiday year that starts on 1 January, the new changes will take effect for that particular worker from 1 January 2025.
Definitions of irregular hours worker and part year worker
Certain new holiday rights, including rolled up holiday pay and the new holiday accrual rules (see below), only apply to irregular hours workers and part year workers. We have been given definitions for these types of workers, which are not entirely clear and open to interpretation. No doubt there will be case law in due course, which may help clarify this.
Irregular hours worker: Someone whose paid hours within each pay period during the term of their contract are wholly or mostly variable.
Part year worker: Someone who is required to work only part of the year, with periods of at least a week in which they are not required to work and are not paid.
New rules of accrual of holiday entitlement for irregular hours workers and part year workers
From 1 April 2024 there are new rules on the accrual of holiday entitlement for irregular hours workers and part-year workers. These workers will now accrue holiday entitlement on the last day of each pay period at a rate of 12.07% of the hours they have worked during that same pay period. This means that irregular and part-year workers will accrue holiday entitlement as they work, instead of receiving their annual holiday entitlement at the start of the year. Employers will have discretion to consider if workers can book and take more holiday than they may have built up under the new rules, subject of course to existing contractual rights to holiday entitlement and pre-agreed arrangements.
Note that if a worker has a holiday year that started before 1 April 2024, this new accrual system will not apply to them until the next anniversary of their holiday year. For example, if a worker has a holiday year that starts on 1 January, the new changes will take effect for that particular worker from 1 January 2025.
There are special rules where annual leave continues to accrue when a worker is absent on sick leave or statutory leave (e.g. maternity, paternity, adoption leave).
New regime on carrying over annual leave into subsequent holiday years
Since 1 January 2024, under the new holiday pay rules there are various grounds on which workers are entitled to carry over their statutory paid holiday entitlement.
The new regulations in effect write into UK law legal rights established under previous EU case law, which allowed workers to carry over annual leave for reasons of sickness and family leave. The new regulations confirm that the current position is:
- Workers can carry forward their entire 5.6 weeks statutory holiday entitlement into the next holiday year if they aren’t able to take it due to family leave, such as maternity leave.
- Workers can carry forward their four weeks of EU annual leave entitlement if they aren’t able to take it because of sick leave (5.6 weeks may be carried over for irregular hours and part year workers), but it must be used within 18 months of the end date of the holiday year in which the original holiday entitlement accrued.
The new regulations also require that workers can carry over four weeks of their untaken statutory holiday entitlement (5.6 weeks may be carried over for irregular hours and part year workers) if an employer:
- Has not recognised their right to paid annual leave, a common example of this is where an employer has identified a worker or employee incorrectly as a self-employed contractor.
- Did not give a worker reasonable opportunity to take their leave or failed to encourage them to take their leave; or
- Failed to inform a worker that their untaken leave must be used before the end of the leave year to prevent it from being lost.
Practical steps for employers to take include:
- Familiarise yourself with the new rules, see the recently updated government guidance on statutory holiday for further information.
- Ensure any newly adopted practices take into account and work with your holiday year;
- If your holiday pay method is changing, update your contracts and policies;
- If you are paying rolled up holiday pay, ensure this is reflected in your payslip information;
- Encourage your workers to actually take their holiday entitlement, including to ensure you are compliant with the regulations and that workers take periods of rest to support their wellbeing.
Our Employment team frequently advises employers on holiday pay, including how to best implement these new changes.