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18 Dec 2023

Holiday season brings gold for some, with myrrh changes to holiday entitlement and pay (but could leave some employers incensed)

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As holiday season is upon us, so are changes to holiday entitlement and pay, a notoriously tricky area for employers. In the post-Brexit landscape, EU supremacy over UK law ends at the end of 2023 which has resulted in the government making a number of reforms. In this alert we set out the key points for employers.

Holiday pay

The government has decided to retain the existing "pots of leave" i.e. the statutory entitlement to a total of 5.6 weeks' paid leave which is made up of 4 weeks' leave under EU law and 1.6 weeks' additional leave under the Working Time Regulations 1998. 

The government has codified the existing case law on what should be paid (essentially what constitutes "normal remuneration") during periods of leave. Those rules apply to the 4 weeks' EU leave for regular workers and the full 5.6 weeks' leave entitlement for irregular hours or part-year workers. (As an aside it's worth noting that the wording of the regulations also raises issues about who may be defined as an "irregular hours" worker.)

The items to be included in holiday pay are:

  • 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.

While annual performance bonuses are not explicitly included in the regulations (and have been a topic of contention under existing case law), they are likely to be within scope when calculating holiday pay. This will result in an added expense for employers who need to include this element within holiday pay. We advise employers to take this into account for their bonus seasons as this change applies from 1 Jan 2024.

Carrying forward annual leave

The government is also codifying a number of principles on holiday carry-over that are currently set out in case law, and these will apply from 1 Jan 2024. The new regulations confirm that workers can carry over to the next holiday year all 5.6 weeks' holiday, if they couldn’t take it in their leave year because of statutory family-related leave. If they were on sick leave and unable to take the holiday, they can carry forward their 4 weeks' leave and this must be taken within 18 months of the leave year in which the entitlement arose.

Workers can also carry forward their untaken 4 weeks' leave (the EU based leave) if their employer is at fault because in any leave year, the employer fails to:

  • recognise a worker’s right to paid annual leave;
  • give the worker a reasonable opportunity to take the leave to which they are entitled; or
  • inform the worker that any leave not taken by the end of the leave year, which cannot be carried forward, will be lost.

They can only carry their leave  forward until the end of the first full year in which the employer was no longer at fault.

Rolled-up holiday pay

The government will introduce rolled-up holiday pay for irregular hours and part-year workers. Rolled-up holiday pay is the practice of "rolling-up" holiday pay to be paid as the same time as basic pay. European case law had held that this was unlawful but the government has now proposed amendments to the Working Time Regulations 1998 to allow this practice.

This will likely be a welcome change for employers tasked with calculating paid holiday entitlement for part-year and irregular hours workers. The amended regulations mean that the employers can simply pay an extra 12.07% to the worker and when the worker takes holiday (which they still should take) they do not get any extra pay. The employer must itemise the holiday pay separately on the payslip.

There are special rules governing rolled-up holiday pay for those on sick leave or annual leave.

Annual leave accrual methods for irregular hours and part-year workers

From 1 April 2024, a new statutory provision will be introduced to address an issue exemplified in the Harpur Trust v Brazel case which went to the Supreme Court and  found that the existing framework does not allow annual leave to be pro-rated downwards to reflect hours actually worked.  Under the new provision, irregular hours and part-year workers will accrue annual leave entitlement at the end of each pay period, calculated as 12.07% of the hours they have worked in that pay period.  There are special rules governing accrual when on sick leave or family related leave.

There remains no guidance on how to convert holiday entitlement in hours to days and this remains an issue for employers to grapple with.

The majority of changes for irregular hours and part-year workers will apply to holiday years beginning on or after 1 April 2024.

Record keeping requirements

The government is also proposing to clarify the record keeping requirements for businesses, as there were areas of uncertainty caused by the legal interplay of a European case and a provision in the Working Time Regulations 1998. The draft regulations clarify that businesses do not have to keep a record of the daily working hours of their workers if they are able to demonstrate compliance without doing so. 

Next steps

  • Employers should audit their workforce, including whether they have irregular-hours or part-year workers.
  • Audits should also be carried out on what is currently included in holiday pay (e.g. overtime, commission, allowances, bonuses).
  • Employers should then check compliance with the new rules and make any changes necessary, including regarding accrual of leave and ensuring they encourage workers to take leave. This may involve updates to contracts and policies and legal advice should be sought to ensure updates are made in a legally compliant manner.
  • If employers think that they can make use of the new rolled-up holiday pay changes, they should consider next steps in implementing this, bearing in mind that actually taking leave is a health and safety expectation.

If you have any questions on this alert or any other employment law matter please contact Anne Pritam, Leanne Raven or your usual Stephenson Harwood contact.

This update is based on the draft regulations which at the time of writing are in draft form and remain subject to Parliamentary approval.

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KEY CONTACT

Leanne Raven

Leanne Raven
Senior knowledge lawyer

T:  +44 20 7809 2560 M:  +44 7827 353 108 Email Leanne | Vcard Office:  London