New legislation on holiday entitlement and pay

The Government is proposing to make changes to holiday rights from 1 January 2024. New Regulations will ensure that some EU rules on holiday entitlement and pay are kept when EU supremacy over UK law ends on 31 December 2023. There will also be a new system for calculating holiday entitlement for part-year workers and workers working irregular hours.

Consultations

Earlier this year the Government consulted on proposals to make changes to holiday rights. The proposals were set out in two separate consultations, one dealing with holiday entitlement for part-year and irregular hours workers and the other dealing with reforms following the UK’s departure from the EU. The Government has now responded to both consultations and published draft Regulations which, if approved by Parliament, will make changes to the Working Time Regulations 1998 from 1 January 2024.

Holiday entitlement and holiday pay

Current position

Currently, workers are entitled to 5.6 weeks’ holiday which is split in two, with Regulation 13 implementing the 4 week minimum holiday entitlement under the EU Working Time Directive and Regulation 13A providing for an additional 1.6 weeks’ UK holiday entitlement. As EU law only applies to the EU entitlement, this has resulted in different rules applying to the EU and UK entitlements, for example in terms of whether and when the holiday can be carried over into a subsequent leave year and what elements of remuneration must be included when calculating holiday pay. EU law generally requires workers to take their holiday in the holiday year in which it accrues and only allows unused holiday to be carried over in certain limited circumstances, whereas the Working Time Regulations 1998 allow the additional 1.6 weeks’ leave to be carried over if permitted by a relevant agreement, such as the employment contract. EU law requires workers to receive their normal remuneration when on holiday, including regular overtime, commission and certain allowances. However, UK law allows most workers to be paid the additional 1.6 weeks' leave at basic pay only.

Consultation proposals

The Government had proposed to combine the two sets of leave to create a single entitlement to 5.6 weeks’ holiday and have one set of rules applying to this holiday entitlement. However, following the consultation responses, it has decided against this proposal for now.

What is proposed now?

Instead, the Government has decided to maintain the two distinct ‘pots’ of annual leave and the two existing rates of holiday pay so that workers can continue to receive 4 weeks at their normal rate of pay (although that term is not used in the draft Regulations) and 1.6 weeks at their basic rate of pay (although in reality many employers do not differentiate and pay their workers their normal remuneration for the full 5.6 weeks).

Reflecting EU case law, the draft Regulations provide that pay for the basic 4 week EU based holiday must include:

• payments, including commission payments, which are intrinsically linked to the performance of tasks which the worker is contractually obliged to carry out;
• 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 the worker in the previous 52 weeks.

Holiday carry over

The Government has confirmed that it intends to preserve workers' existing rights, derived from EU case law, to carry over untaken holiday where they have been unable to take the holiday in certain situations.

Maternity and sick leave

The draft regulations state that workers can carry forward into the following leave year:

• their full 5.6 weeks’ statutory holiday where they have been unable to take holiday due to being on maternity leave or other family leave;
• their 4 weeks EU based leave where they have been unable to take it due to being on sick leave. However, they must take it within 18 months of the end of the leave year in which the entitlement originally arose.

Other cases

Workers will also be able to carry forward any untaken leave from the basic four week entitlement if their employer:

• does not recognise their right to annual leave or paid annual leave (because, for example, they are wrongly classed as a self-employed independent contractor);
• does not give them a reasonable opportunity to take leave or encourage them to do so; or
• does not warn them of the risks of losing their annual leave entitlement at the end of the holiday year.

Holidays cannot be carried forward beyond the end of the first full leave year in which the employer observes these rights.

Holiday accrual in the first year of employment

The Government consulted on a proposal that statutory holiday entitlement should accrue during the first year of employment at the end of each pay period, rather than at the beginning of each month. However, it has decided not to proceed with this proposal and so workers (apart from irregular hours workers and part-year workers where a new accrual system will operate) will continue to accrue annual leave in their first year of employment as they do now by receiving 1/12th of the statutory entitlement on the first day of each month.

New holiday rules for irregular-hours and part-year workers

The Government is introducing a new holiday regime for regular hours and part-year workers. The original consultation paper had proposed a system where irregular-hours and part-year workers would accrue holiday as a percentage of their average working hours, calculated over a 52-week reference period. This was intended to avoid the difficulties arising from the Harpur Trust v Brazel decision, where the Supreme Court ruled that the holiday entitlement of part-year workers must not be pro-rated to take account of weeks not worked. This resulted in part-year workers having a larger paid annual leave entitlement than part-time workers working the same number of hours as them, but across the whole year.

The Government has decided against the option consulted on and has instead opted for a simpler system. From 1 April 2024, both part-year workers and irregular hours workers will accrue annual leave entitlement on the last day of each pay period at the rate of 12.07% of the number of hours worked during that pay period. This is subject to a maximum of 28 days per year. There are also special rules dealing with accrual where a part-year or irregular hours worker is on sick leave, maternity or other statutory leave.

The draft Regulations also contain a definition of an irregular hours and part-year worker:

• A person will be an irregular hours worker if the number of paid hours that they will work in each pay period is, under the terms of their contract, wholly or mostly variable.
• A person will be a part-year worker if they are required to work only part of the 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. Periods of sick leave or statutory leave (such as maternity leave) are ignored.

Rolled up holiday pay

Rolled up holiday is where an employer includes an additional amount in respect of holiday pay in each payslip (and then the worker receives no pay when they take their holiday). This practice is not permitted under EU law due to concerns that it disincentivises workers from taking holiday (as they can earn more money by staying at work). The Government had proposed to introduce rolled-up holiday pay as an option for all workers but has now decided to limit this to irregular hours workers and part-year workers.

The draft regulations will allow employers the option of rolled-up holiday pay for holiday years from 1 April 2024, as long as:

• the worker counts as an irregular hours or part-year worker (see above);
• holiday pay is calculated as a 12.07% uplift to the worker’s total pay for work done;
• the extra 12.07% is paid at the same time as pay for the work done; and
• the holiday pay is itemised separately on the payslip.

Rolled up holiday pay does not mean that workers can work 52 weeks of the year, without taking any holidays. The onus is still on employers to make sure they have at least 28 days off.

What type of leave is being taken?

The draft Regulations (and the Working Time Regulations 1998) continue to differentiate between the basic 4 week EU based leave and the additional 1.6 weeks UK based leave but do not address which type of leave is being taken when. The recent Supreme Court’s decision in Agnew v Chief Constable of Northern Ireland concluded that different types of leave are not necessarily taken in sequence (basic leave first, additional leave next and any extra contractual entitlement last) and considered that, if it's not practical to distinguish between them, all the leave to which a worker is entitled forms part of a single composite pot. It would therefore be sensible for employers to specify in the employment contract the order in which leave is taken so that it is clear which rights apply when a worker is taking leave (in terms of pay) or seeking to carry over untaken leave.

What does this mean for employers?

Employers will need to familiarise themselves with the changes. Those who have not been paying workers their normal remuneration (including regular overtime and commission) for the 4 week EU based holiday entitlement will need to change their approach now that it is clear that the EU rules are being kept. Employers will also want to review employment contracts and holiday policies and consider specifying the order in which annual leave is taken, as well as making it clear that workers should take their holiday and warning of the risk of losing it at the end of the holiday year where they have not taken it.

Employers of part-year and irregular hours workers are likely to need to amend their employment contracts and holiday policies to reflect the new holiday accrual rules. They will also want to consider whether to use rolled up holiday pay. Any changes to the employment contract will need the worker’s agreement .