Holiday Pay: Your Essential Guide to the new rules

It’s been a long and difficult road — but the end is finally in sight for many of the problems and uncertainties surrounding holiday pay law.

If that sounds too good to be true, we can at least say that next month marks a new beginning; a suite of legal changes, designed to clarify the calculation and administration of holiday pay generally, and specifically for irregular and part-year workers, come into force for leave years beginning on or after 1 April 2024.

The changes are introduced by the Employment Rights (Amendment, Revocation and Transitional provision) Regulations 2023  (the ER Regs) which amend the Working Time Regulations 1998 (WTR).

Some teething problems are anticipated, however, as employment lawyers, employment tribunals and HR professionals learn to navigate the new legislation. We explain everything you need to know about the new regime and highlight potential trouble-spots.

Difficult definitions: ‘A week’s pay’ for holiday pay purposes

The Retained EU Law (Revocation and Reform) Act 2003 (REULA) grants powers to government to restate, revoke or replace any remaining EU law in force in the UK until 23 June 2026. This includes case-law of EU courts.

The ER Regs exercise this power and attempt to set down in legislation (or ‘codify’) EU case-law principles governing holiday pay in several important respects.

Regulation 16 Working Time Regulations 1998 is amended to update the definition of ‘a week’s pay’ for the purposes of calculating holiday pay, to include certain additional elements.

This is not straightforward, as case law has built up incrementally over the past decade adding to our understanding of which elements of remuneration should be included in holiday pay (most notably Williams v British Airways and Lock v British Gas amongst many others). A ‘rule of thumb’ emerged (initially in Willams) that holiday pay should reflect ‘normal remuneration’. However, these words are not used in the new legislation. Instead, a more prescriptive approach has been adopted. ‘A week’s pay’ for these purposes now includes;

• Payments including commission payments which are intrinsically linked to the performance of tasks which the worker is obliged to carry out under their contract;
• Payments relating to professional or personal status, 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;

Perhaps surprisingly, the government has chosen to retain the concept of two different ‘pots’ of leave; the statutory minimum 20 days/4 weeks leave provided by Regulation 13 WTR (which emanated from the EU Working Time Directive) and the additional 8 days/1.6 weeks provided in the UK by our domestic WTR Regulation 13A; and the different approach to pay for each. It was widely anticipated that the government would take the opportunity to simplify the law by combining the two into a single 5.6 week entitlement.

It therefore remains the case that the expanded statutory definition of holiday pay applies to the first 20 days/4 weeks leave provided under Regulation 13 only. The position for the additional 8 days / 1.6 weeks’ holiday provided for by Regulation 13A remains that it must be paid at the basic pay rate. However of course, as currently, employers may choose to disregard this distinction to make holiday pay systems simpler and easier to administer. Carrying over leave

Importantly, the new legislation repeals the Working Time (Coronavirus)(Amendment) Regulations 2020 which affect the carry-over of leave impacted by COVID-19. Previously, workers could carry over untaken leave into the next two years if they could not take it because their work was affected by the pandemic. Any leave carried over for this reason must be used by 31 March 2024. Where a worker’s employment terminates before that date, they will be entitled to payment-in-lieu of any remaining entitlement to COVID carry-over leave.

Beyond this, the legal position on ‘carry over’ will not change but will be set out clearly in one place and, hopefully, will be easier to understand and implement (Amended Regs. 13 and 13A and new Reg. 15D)

As currently, workers are ordinarily not permitted to carry over the statutory minimum 20 days leave provided by Regulation 13 Working Time Regulations, as it must be taken for health and wellbeing reasons. However, they may carry over the additional 8 days provided by Regulation 13A, with the agreement of their employer. Carry over of any additional leave depends on the terms of the contract.

EU case law had established that where a worker has unavoidably been unable to take holiday due to statutory family leave (such as maternity leave) the worker may carry over leave into the next leave year. This right, which applies to both Regulation 13 and 13A holiday, is now confirmed in UK legislation.

Similarly, the EU case-law principle that workers prevented from taking holiday due to sickness absence may carry over leave will now also be enshrined in UK statute. In this situation, leave may be carried over for a maximum period of 18 months after the end of the holiday year in which it falls due (broadly reflecting the EU position in KHS AG v Schulte and the subsequent EAT case of Plumb v Duncan Print Group Ltd). This applies to Regulation 13 holiday only.

The new rules also provide that a worker may carry over 20 days Regulation 13 leave if the employer has incorrectly classed them as self-employed and so has not offered paid holiday (to broadly reflect the case law position in King v Sash Window Workshop Ltd). The carried-over leave will last until the end of the first full leave year where there is no such failure by the employer.

More relevant for most employers though, is the new provision that carry over of Reg 13 leave is also now permitted where the employer has failed to give the worker reasonable opportunity to take leave or encouraged them to do so; or the employer has not informed the worker that the leave will be lost if not used. Again, the carried-over leave will last until the end of the first full leave year where there is no such failure by the employer. In light of this, it is more important than ever to have processes in place to communicate and explain a worker’s holiday rights, and to remind/encourage them to take leave.

Defining  ‘Irregular’ and ‘part-year’ workers

 The changes attempt to define what the terms ‘irregular hours worker’ and ‘part-year worker’ mean.

According to the new legislation and government guidance  a worker is an ‘irregular hours worker’ in respect of a particular holiday year “if the number of hours they will work in each pay period…is under the terms of their contract, wholly or mostly variable”.

This definition is intended to capture individuals who work a different number of hours each week, including work under zero-hours contracts.

A worker is a ‘part-year’ worker if ‘under the terms of their contract, they are required to work only part of that year, and there are periods within that year …of at least a week which they are not required to work and for which they are not paid’

According to the guidance, this is intended to capture arrangements such as term-time only working.

Calculating holiday entitlement for irregular/part-year workers

In Summer 2022, the Supreme Court held in the case of Harpur Trust v Brazel that part-year workers on permanent contracts were entitled to a full 5.6 weeks annual leave, which should not be pro-rated according to the number of hours they work.

In many respects, this decision was confusing and difficult to implement in practice. It also led in some contexts to part-year workers (such as term-time only employees) receiving a greater holiday entitlement than part-time employees working the same hours across the whole year. There was also a risk that part-year workers working only a few weeks each year would receive holiday entitlement disproportionate to the hours they worked.

The new legislation deliberately reverses the decision in Harpur Trust v Brazel to allow holiday entitlement to be pro-rated for irregular hours and part-year workers.

Further, the Working Time Regulations 1998 have been amended to expressly include the 12.07% calculation method, familiar to many employers of part-year/irregular hours workers and widely used prior to the Harpur Trust decision (new Regulation 15B).

The 12.07% figure represents the statutory entitlement of 5.6 weeks’ annual leave, expressed as a percentage of the remaining 46.4 working weeks in the year (5.6/46.4 x 100). Note that the distinction that currently exists between Regulation 13 holiday and Regulation 13A will not continue  for irregular hours and part-year workers under Regulation 15B, which creates a single, unified holiday entitlement for those workers, of 5.6 weeks.

For all workers in scope, annual leave will accrue on the last day of each pay period (e.g. each week, or month) at a rate of 12.07% of the hours worked in that pay period.

A proposal to calculate holiday entitlement over a 52 week ‘look back’ period has been scrapped in favour of this easier to administrate method, except in cases where a worker has been on an extended absence (see below).

The proposal that, at the beginning of a new leave year, an employer should be able to set a ‘fixed-pot’ annual leave entitlement for a part-year/irregular hours worker, based on the previous 52-week leave year will not be taken forward. This may be due to concerns that, if a worker significantly increased their hours, a holiday entitlement based on the fewer hours worked in the previous year might not allow sufficient opportunity for rest and recovery.  

Accruing holiday entitlement during absences

Where a worker has extended periods of absence throughout the year (such as maternity leave, or sickness absence) it will not be workable to apply the 12.07% accrual method at the end of each pay period.

In these cases, the new rules say that a 52 week ‘look-back’ reference period should be used to work out the average hours worked per week. Any weeks where the worker has been on maternity/family leave or on sick leave should be excluded. However, weeks not worked for any other reason should be included.

This means that the reference period may need to go back further than 52 weeks, up to 104 weeks (2 years). If the individual has not worked with the employer for long enough, and there are fewer than 52 weeks to take into account, the reference period is shortened to that lower number of complete weeks.

The employee will accrue annual leave at a rate of 12.07% of this weekly average figure, multiplied by the number of weeks they have been absent. The calculation should be performed at the end of each period of absence. For example, if a worker takes a period of maternity leave, and returns to work for a few weeks before going off sick, two calculations will be required (one at the end of the maternity leave period and another on their return from sick leave). The government guidance provides an example of how this might work in practice.

Note also that as there will no longer be a distinction between Regulation 13 holiday and Regulation 13A holiday for irregular hours and part-year workers under Regulation 15B, all 5.6 weeks’ holiday entitlement for irregular hours and part-year workers must be taken in the year it falls due unless the worker and employer agree that ‘part’ of the leave may be carried over into the next leave year (Regulation 15D).

Holiday Pay: Two Options

The above changes relate to working out an irregular/part-year worker’s holiday entitlement.

Separately, under the new rules, employers have two options for working out holiday pay for irregular and part-year workers.

‘Count back’ method

The first option is to calculate pay when the leave is taken, by calculating the worker’s average pay over a 52 week ‘look back’ reference period. Only weeks where a worker has received pay should be included. Weeks where no remuneration is earned should be excluded. Again, an employer may count back more than 52 weeks if necessary, but no further back than 104 weeks.

If a worker has not been in employment for long enough to build up 52 weeks’ worth of pay data, their employer should use however many complete weeks of data they have.

 ‘Rolling Up’ method

The second option is to use ‘rolled up’ holiday pay — a method which had been discredited by previous case-law but is now expressly written into the legislation as a legally compliant option for employers (new Regulation 16A). Rolled-up holiday pay allows employers to include an additional amount with every payslip, as opposed to paying holiday pay when the leave is taken. In the past, rolled-up holiday pay has been a popular option for casual workers or those who work very infrequently or sporadically.

The worker will receive 12.07% of their total pay in each pay period (e.g. each week or month) as an additional payment, on top of their normal salary. When leave is taken, or is carried over, to a subsequent leave year, no additional payment will be required as the leave will already have been paid for at the time the work was done. A 52-week averaging system will apply for workers on sick leave or statutory leave such as maternity leave.

Rolled up holiday pay must be clearly marked as such on the worker’s payslip if they are to use this method of calculation, which is only an option for irregular hours or part-year workers; a proposal in the government’s consultation paper to extend rolled up holiday pay to all workers has been abandoned. If employers intend to start using rolled-up holiday pay, it is crucial to also check whether existing contracts allow for this; if not, they may need to be amended.

It is also important to remember that, even where holiday pay is ‘rolled-up’, workers must still be given the opportunity to use their holiday in practice.

Again, the government guidance includes worked examples of both calculation methods.

Comment

There is a lot of new law to digest here but, in the most part, the changes are intended to codify the current position, and minimise uncertainty going forward around the weight to be attached to holiday pay principles derived from EU case law.

It is important to remember that the changes apply only to leave years commencing on or after 1 April 2024, so employers who use calendar years will not be fully impacted by the changes until 1 January 2025.

The headline for employers is the ‘permission’ to return to the 12.07% calculation method, which may be frustrating to organisations which have already changed their practices following Harpur Trust. However, we know that many employers of part-year/irregular hours workers prefer to calculate holiday in entitlement in hours and struggled with the fact that there was no single, clear legislative mechanism to express in hours the 5.6 weeks’ leave posited by Harpur Trust, for individuals with fluctuating working patterns. The new calculation method largely solves that problem.

It also feels fairer and more logical for some element of pro-rating to apply to the holiday entitlement of part-year workers, to put them on par with part-time workers who work throughout the year.

Overall, the 12.07% calculation method is likely to result in a lower holiday pay bill for employers than the method set out in Harpur Trust, especially those employers who engage part-year workers who work very infrequently.

The reintroduction of ‘rolled-up’ holiday pay, is really just an endorsement of a practice that never completely went away. Although deemed unlawful by case-law (Robinson-Steele v PD Retail Services) a caveat in this decision meant that ‘rolled up’ holiday pay arrangements could potentially still be used if they were fully transparent and clearly involved an addition to basic pay. Many employers chose to take a risk and continue ‘rolling-up’; the new rules will now take the jeopardy out of this more convenient practical method, so long as the payslips and contractual position are in order.

Arguments over the nuances of holiday pay are unlikely to disappear altogether though. The new statutory definitions, intended to re-state EU case-law principles have already, even before implementation, cause some dispute and confusion in legal circles. Further litigation may emerge to explore the meaning and scope of these definitions, and to consider whether the government intended to replicate EU law exactly or has made some stealthy tweaks for policy reasons.

For example, there is already a query over whether the new definition of ‘part-year’ worker will capture term-time workers who are paid in equal instalments throughout the year.

Other points of contention may include whether bonuses or other periodic payments fall to be included in holiday pay; the old debate over when a payment is ‘regular’ enough to count has not gone away.

‘Simplifying’ this complex, tangled topic was never going to be easy. We will have to watch and wait to see whether the government’s best attempt will prove a success.