Changes to holiday leave and pay – are you ready?

Workers are entitled to 5.6 weeks of paid annual leave under the Working Time Regulations 1998 (the Regulations). This is made up of 4 weeks statutory leave introduced by the Working Time Directive (20 days for a full-time worker); and 1.6 weeks additional leave introduced by the Regulations (8 days for a full-time worker). In some circumstances, the calculation of holiday pay can differ depending on whether the holiday is statutory or additional leave.

Proposals for reform

Earlier this year, the Government published consultation on proposals for reform of employment law in relation to holiday entitlement and pay. The proposals included:

Removing requirements on business to keep working hour records.
The introduction of rolled-up holiday pay, under which employees receive an enhancement with their pay to cover their holiday pay entitlement rather than receiving holiday pay when they take their annual leave.
Merging statutory and additional annual leave, while maintaining the same amount of statutory leave entitlement overall.

The Government had also earlier published consultation on the calculation of holiday entitlement for part-year and irregular hours workers. This followed the judgment in the case of Harpur Trust v Brazel. In that case, the Supreme Court had found that the 12.07% method often used by employers for calculating holiday entitlement was incorrect.

Response to consultation

In its response to consultation the Government confirmed that:

It will not introduce a single leave entitlement. The two distinct ‘pots’ of annual leave and two existing rates of holiday pay will be maintained.
It will legislate to clarify what is considered ‘normal remuneration’ for the purposes of calculating holiday pay.
It will introduce rolled up holiday pay, but for irregular hours workers and part-year workers only. Rolled up holiday pay will not be introduced for full time or full year workers.
It will introduce an accrual method to calculate holiday entitlement at 12.07% of hours worked in a pay period for irregular hour workers and part-year workers.
It will restate various EU case law where necessary to retain workers’ overall level of protection and entitlement in relation to carry over of annual leave where the worker is unable to take that leave due to sickness absence or statutory leave.

The Government considered that the consultation showed a level of misunderstanding surrounding record keeping requirements on employers under the Regulations. It confirmed that employers will still need to keep adequate records to demonstrate compliance with the Regulations and noted the need to clarify current standards and protect workers’ rights.

New legislation

Draft legislation has now been introduced which, if implemented, will come into force on 1 January 2024. The draft legislation amends the Working Time Regulations and seeks to implement the commitments made by the Government in its response to consultation.

Carrying forward unused holiday

In relation to the entitlement to carry forward unused annual leave from one year to another, the draft legislation confirms that:

where a worker is unable to take statutory or additional holiday due to a period of statutory leave, they will be entitled to carry it forward into the next leave year.
where a worker is unable to take statutory leave due to sickness absence, they will be entitled to carry it forward into the following leave year, provided it is taken within 18 months from the end of the leave year in which it accrued.

Irregular hours workers and part-year workers

Under the draft legislation, a worker is an ‘irregular hours worker’ if the number of paid hours they will work in each pay period is, under the terms of their contract, wholly or mostly variable. A worker is a ‘part-year worker’ if under their contract they are required to work only part of the year and there are periods of at least a week which they are not required to work and for which they are not paid.

For these workers, annual leave in each leave year will accrue at 12.07% of the number of hours that they have worked during the pay period, up to a maximum of 28 days. There is also a three-step provision for calculating annual leave entitlement accrual during a period of sick leave or statutory leave, and clarification of when it can be carried forward.

Express provision is also included about the calculation of holiday pay. Case law has clarified that for statutory annual leave, this should be based on ‘normal remuneration’. The new legislation clarifies that this will include a) payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under their contract; b) payments for professional or personal status relating to length of service, seniority or professional qualifications; and c) other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

The draft legislation also includes provision for rolled up holiday pay. This will be paid at the same time as the worker’s pay and may be a 12.07% uplift to the worker’s pay. All types of payments must be included when calculating the worker’s pay. The pay slip must indicate the amount of holiday pay that has been paid in that pay period.

Emergency COVID legislation

The draft legislation revokes the emergency provisions introduced during the pandemic which allowed employees to carry forward holiday entitlement where it was not reasonably practicable to take that leave due to COVID. Any leave accrued before 1 January 2024 must be taken on or before 31 March 2024.

Comment

Employers can prepare by conducting a review of their current policies and considering whether they will need updating in light of the draft new legislation.

14 November 2023

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