Holiday Pay Changes: How Entitlements will be simplified in 2024

For years, employers in the UK have grappled with the complexities of calculating and administering holiday pay. The landscape of employment law, especially regarding holiday entitlements, has been continually evolving, often leaving businesses in a state of uncertainty. The turning point in this saga was the landmark 2022 Harpur Trust v Brazel case, which marked a significant deviation from the established norms, especially for atypical workers.

This article aims to demystify the upcoming Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023. Although still in draft form, these regulations are poised to become effective on 1 January 2024, introducing several critical changes that employers must be aware of.  

These changes not only encapsulate employee-friendly codifications of existing case law but also present new opportunities and challenges for employers. They hold particular significance for those who employ atypical workers or have yet to update their holiday pay policies in line with recent legal developments.

Understanding the Key Changes

1. Rolled-Up Holiday Pay: A Revised Approach: Previously deemed unlawful, the concept of ‘rolled-up holiday pay’ will now be permissible under certain conditions. 

2. Definitions for atypical workers:  Rolled up holiday pay can only be used for atypical workers and these will be defined as those workers who work irregular hours and part-year workers. 

3. Redefining ‘Normal Remuneration’:  The 2024 regulations will clarify what constitutes ‘normal remuneration’ for Working Time Directive (WTD) holiday pay calculations. 

4. Response to Harpur Trust v Brazel:  Reverting to the previous guidance, the new law will re-introduce a 12.07% annual leave accrual method for irregular hours and part-year workers.

5. Carry-Over Provisions in Special Circumstances:  The new rules will explicitly allow the carry-over of annual leave for workers on maternity/family-related leave or sick leave, addressing uncertainties in post-Brexit EU law.  Additionally, there will be explicit provisions for carry-over in cases where employers fail to provide reasonable opportunities for leave.

Who is Considered an Irregular-Hours Worker?

An irregular-hours worker is someone whose contract specifies that the amount of hours they work in each payment cycle varies significantly or entirely during the contract period within that year.

This definition generally applies to workers on zero-hours contracts and those engaged in casual or ‘bank worker’ agreements. There may be a question, though, about workers who have a mix of fixed hours for certain times of the year and variable hours for others. This is due to the stipulation that their work hours must be largely or entirely variable ‘in each pay period’ over the contract duration.

Who Qualifies as a Part-Year Worker?

A part-year worker is someone whose contract requires them to work only during certain parts of the year. This includes periods within the contract year where they are neither expected to work nor paid for at least a week (excluding any sick leave or statutory family leave).

Typically, this encompasses individuals who work during term time only, exam supervisors, and seasonal workers at sports clubs. Some term-time only workers, like school teachers and support staff, who receive a year-round salary paid over 12 months, including times they are not working (like school holidays), might still be considered part-year workers. This is because their pay is for their availability during, rather than for, the times they aren’t working.

Revised Explanation of the New “Normal Remuneration” Definition and Its Application

Basic pay and normal pay – what is the difference?

“Basic” pay simply constitutes the basic salary that workers are entitled to before any benefits; the minimum amount of money a worker can receive before tax or any bonuses. 

“Normal” pay is a little bit more complicated, and although the legislation doesn’t explicitly mention normal pay, it does stipulate that it must encompass:

• pays including commission, which are inherently associated with the execution of tasks the worker is contractually obligated to perform;
• payments that reflect professional or personal status in terms of service duration, seniority, or professional qualifications;
• additional payments like overtime that have been consistently paid to the worker over the past 52 weeks.

Why are there different rates of pay?  It is important to understand the different rates of pay because they will apply to the different types of leaving being taken.  For the vast majority of employers, all leave is treated the same, however, there is a difference to which rate of pay will apply to which period of leave.

There was uncertainty whether or not the government would keep both types of leave separate or to use the opportunity to combine the two entitlements making holiday rates of pay simpler.  However, the government decided to keep the different types of leave separate meaning that employers must understand when the different rates of pay apply.

In the UK, workers are entitled to a total of 5.6 weeks of holiday annually. This is broken down into 4 weeks of holiday under the Working Time Directive (WTD) and an additional 1.6 weeks under the Working Time Regulations (WTR).  The 1.6 weeks providing clarity that bank holidays in the UK are in addition to the 4 weeks holiday derived from EU-Law.

Put simply: The way holiday pay is calculated varies between the two: WTD holiday pay is based on “normal remuneration,” while WTR holiday pay is calculated on basic salary.

	Regulation 13 Leave	Regulation 13A Leave
How much holiday entitlement?	4 weeks	1.6 weeks	Total entitlement 5.6 weeks
Does it roll over to the next holiday year if an employee is unable to take due to sickness or maternity?	Yes, but leave must be taken within 18 months	No
How much is the employee paid?	Normal pay, i.e. basic pay plus typical overtime, commission, some allowances and some bonuses	Basic salary only

For the purposes of calculating holiday pay, employers who have not included payments such as overtime, commission etc. in holiday pay calculations will face the decision of whether to treat the 4 weeks’ WTD leave and the 1.6 weeks’ WTR leave differently. Commonly, employers prefer a uniform approach to both types of leave for simplicity.

In reality, many employers have tended to adopt a practical approach, paying all 5.6 weeks of annual leave at the elevated ‘normal pay’ rate. Given that the draft regulations retain the current state of affairs, there is no obligation to alter this practice.  

It is a reminder for those employers who have never adjusted to the EU’s approach, e.g. that have only paid out basic pay, the time to catch up is now!

‘Rolled-up’ holiday  – what is it?

‘Rolled-up’ holiday pay means paying an employee’s holiday pay at the same time as their normal pay (‘rolling’ the two forms of payment together). It was considered unlawful by the European Court of Justice due to a perceived risk that it would discourage staff from taking time off.  As such, the government has opted to authorise the approach if certain conditions are met – these being:

• The employee is considered to be an irregular hours or part-year worker;
• Their holiday pay is calculated at 12.07% of all pay for work done;
• The added 12.07% is paid at the same time as that for the work done;
• The holiday pay is itemised separately on the payslip. 

This approach is set to be quite a relief for employers with workers whose hours are irregular or occasional, and stands to save quite a bit of admin time. Put simply, it will allow employers to easily manage holidays by simply paying those workers an extra 12.07% to represent holiday pay – then, if the employee does take a holiday, they don’t get paid that extra holiday pay. 

Why 12.07%? Well, the legally required minimum annual leave for a year, which is 5.6 weeks, is equivalent to 12.07% when represented as a fraction of the total working weeks in a year (46.4 weeks). Utilising the 12.07% figure to calculate holiday benefits or remuneration for employees working irregular hours or part of the year ensures their rights align with those of regular full-time employees.

These changes doesn’t mean that your workers can just start doing 52-week years just because they have irregular hours. They’re still entitled to a minimum of 5.6 weeks off, even if that means it is technically unpaid because they have already received their holiday pay. 

Accumulating holiday for irregular hours and part-year workers

Starting from 1^st April 2024, workers with irregular or part-time yearly schedules will earn holiday leave gradually meaning that workers won’t get their full holiday time at the start of the year, instead, they will earn their holiday time as they work throughout the year.  

For every hour they work in each pay period, they will get holiday time equal to 12.07% of those hours, but not more than 28 days in a year.   

Workers will also continue to earn holiday time during sickness absence or family leave.

There are some challenges with this new system. It’s not yet clear how employees with these flexible work hours will schedule and take their holidays. Employers might let staff take more holiday time than they’ve earned so far, but otherwise, employees will likely choose their work hours as per their employment contract.

Overall, this change makes it easier to figure out how much holiday time workers earn, but it’s still not clear how they will manage taking this time off.

Carrying Forward Holiday Days

The draft also details further regulation changes on what employees can do about untaken holiday days. The government has preserved worker’s existing rights derived from EU law regarding carrying over untaken holiday where they have been unable to take holiday in certain sets of circumstances.

If an employer fails to acknowledge a worker’s leave rights, does not provide a chance to take leave, or doesn’t inform the worker about the “use it or lose it” policy (when carry forward isn’t justified), the worker can carry forward leave until the end of the first full leave year where they can take it.

Sickness or maternity leave

The UK government is to replicate the existing established in EU law relating to carrying forward of holiday that they were otherwise unable to take due to sickness or family-related leave into the new regulations. 

The Working Time Regulations will integrate CJEU case law, ensuring workers who can’t take annual leave due to statutory leave (like maternity or other family leave under the Employment Rights Act 1996) have the right to carry it forward to the next year.

Workers will be able to carry forward all of their 5.6 weeks statutory leave into the next year only if they can’t take it due to family leave, and will only be able to take their 4 weeks forward if unable to due to sickness absence. 

Workers unable to take annual leave due to sick leave can carry forward their basic leave to the following year and must use it within 18 months of the end of the leave year in which it accrued.

What next for employers? 

With this fairly weighty draft of new changes, whilst these regulations come into force from 1^st January 2024, for many employers whose holiday year starts before April 2024, these regulations will not be effective for them the start of their holiday year in 2025, for example if the holiday year runs from January to December, the regulations will only come into force in your organisation in January 2025.

For employers wanting to bring forward the effectiveness of these regulations into their organisation, they would need to consider changing their holiday year to April to March of each year, with the requirement to consult with their staff accordingly to effect this variation of terms.

The best thing that employers can do at this moment is to start looking into how their current approach bears up against the new system. 

For instance, if you have workers that are paid commission, overtime or have specific allowances, you should ensure that you have mechanisms to factored these payments into their holiday pay.  This applies to all workers, not just atypical workers working irregular hours or part year.

You should also consider whether or not you’ll need a system to differentiate between the different ‘types’ of holiday. 

As is always the case for, employees should be reminded to use their holiday before the end of the current holiday year since the new system for atypical workers allows them to carry it forward to the next year should they not be encouraged to take their holiday. 

It’s possible that your contracts and policies will need to be changed and updated to fall in line with the upcoming changes. 

For assistance and advice on all of the above, HR:4UK has you covered. Get in touch with us today on 01455 444 222 or email [email protected] and we can take the stress out of holiday pay, employment contracts, and much, much more.