Following our exit from the European Union, our laws now have the potential to diverge from those of the EU. So what does this mean for the right to paid holiday?

Big changes are underway!

During the course of 2024, employers will see some significant changes to the way in which we calculate a worker’s right to paid holiday.  

When considering whether these changes will affect your business, the first thing you will need to consider is whether your workers:

1. Have regular fixed hours of work;
2. Have irregular hours of work, which wholly or mostly vary from week to week or month to month; or
3. Are ‘part-year workers’, such that they are only required to work during part of the year and they are only paid when they are working.

If all your workers have fixed hours of work, then if you have been calculating their paid holiday entitlement correctly in the past, you probably don't need to change anything much going forward. However, if some or all of your workers fall into categories 2 or 3 above, some further thought is going to be required.

Calculating accrued holiday for irregular hours and part-year workers

If you have workers engaged under casual, zero hours or part-year contracts, then in relation to any holiday year beginning on or after 1 April 2024, the statutory minimum holiday entitlement for these workers will now accrue at the rate of 12.07% of the actual hours worked in each pay period. By way of example, if a worker is paid monthly and in a given month has worked a total of 120 hours, then the worker will accrue an entitlement to 14 hours’ paid holiday (12.07% of 120 hours). The employer can round the holiday entitlement up or down to the nearest hour, depending on whether the precise figure includes a partial hour which is more or less than 30 minutes.

The use of the 12.07% figure assumes that the worker is entitled to the statutory minimum holiday entitlement. If the worker enjoys a more generous contractual entitlement, the 12.07% multiplier will need to be amended accordingly.

These changes to the Working Time Regulations 1998 (WTR) also introduce new rules for calculating how much paid holiday an irregular hours worker or part-year worker accrues during periods of family-related leave or sickness. In simple terms, it involves relying on the average hours worked in the preceding 52-week period. However, each case may require rather careful thought.

Calculating holiday pay for irregular hours and part-year worker

Given the challenges employers face in working out when and how to pay irregular hours and part-year workers for their holiday entitlement, over the years, many employers have opted to pay such workers a so-called ‘rolled-up’ rate of pay. In effect, this has meant that for each pay period, the worker receives holiday pay equal to the holiday that has accrued during the relevant pay period. The worker then receives no pay at all if and when they actually take their leave. Although this practice has been popular, technically, it has been in breach of the WTR.  However, now, the practice will finally be lawful. 

If employers do not wish to adopt the practice of paying a ‘rolled-up’ rate of pay and instead prefer to pay holiday pay as and when the holiday is taken, as is already the case, employers will need to conduct an averaging exercise over the previous 52 weeks in order to calculate the holiday pay to which the worker is entitled.

Carrying over holiday

Until now, the basis on which a worker has been entitled to carry forward accrued holiday from one year to the next has been the subject of a patchwork of case law and regulatory provisions. However, with effect from 1 January 2024 the situation is, in some respects, a little clearer.

In cases where a worker is unable to take all of their accrued statutory holiday because they have been taking maternity or other family-related leave, the WTR now clearly states that the worker is entitled to carry forward all of their untaken statutory leave to the following holiday year.

In cases of sickness absence, the situation will be slightly different. More specifically:

• ‘regular hours workers’ can carry forward up to 20 days’ untaken leave, provided it is taken within 18 months of the end of the leave year in which it accrues.
• Irregular hours workers and part-year workers can carry forward all their statutory untaken leave, again provided it is taken within 18 months of the end of the leave year in which it accrues.

The updated WTR also provides for the carrying forward of accrued holiday in other circumstances, including where the worker is in any way denied the opportunity to take their accrued holiday. As was already the case, these provisions put the onus on employers to ensure that they have in place a system of positively encouraging all workers to take their holiday each year, reminding them of any ‘use it or lose it’ arrangements that might otherwise deny them the opportunity to take the paid leave to which they have accrued an entitlement.

Calculating a week's pay

Despite the hope that these changes in the law might simplify the holiday pay regime, it remains the case that, for some workers (i.e. those with regular hours, who work all year round), the rate of pay to which workers are strictly entitled for the first 4 weeks (of their statutory 5.6-week holiday entitlement) is likely to be different to that which relates to the remaining 1.6 weeks. Pay for the first 4 weeks must reflect their ‘normal’ remuneration. Pay for the final 1.6 weeks can be at a more ‘basic’ rate.  

For employees who receive a fixed salary that does not vary from week to week or month to month, the situation remains quite simple. When they take their normal holiday, they will continue to receive their normal pay.

The situation is more complicated for people whose pay varies from week to week. However, the WTR now expressly states that when calculating ‘normal’ remuneration, employers must include within the calculation:

1. Commission payments and other payments intrinsically linked to the work performed;
2. Overtime payments and other payments regularly paid to the worker in the previous 52 weeks; and
3. Other payments relating to length of service, seniority or professional qualifications.

These new statutory measures are intended to replicate the effect of the case law that has built up in this area over recent years. We might hope that this will makes the law more predictable and easier to understand. In reality, there is equally the prospect that it creates the potential for new lines of disputes to arise about the precise meaning of the updated regulations.

Have you got all of that?

It's fair to say that the law relating to holiday pay is likely to remain fiendishly complicated in a small proportion of cases. Certainly, the risks associated with getting things wrong very much remain in place. If you would like to have an informal chat with us about these changes and the impact they may have on your business, please get in touch.