Changes to holiday pay and entitlements

Calculating statutory holiday entitlements and pay has been an area of legal uncertainty, causing practical challenges for employers, for many years now.  The Government has tried to resolve some of these with new legislation and provisions to update the law on holiday pay and calculation that came into force on 1 January 2024.  It has also issued non-statutory guidance on the changes and separate non-statutory guidance on holiday entitlement generally which seeks to explain, in simple terms, workers’ entitlement to annual leave and pay.   

Some of the changes are effective already, and others only apply to leave years beginning after 1 April 2024.  It is yet to be seen whether these new rules will actually simplify an already complicated framework of rules, but it is nevertheless important for employers to consider how these changes impact their business and make sure systems are in place to comply.

1 January 2024 changes 

Clarification of what is included in “normal remuneration” when calculating holiday pay and what leave this applies to

Workers are generally entitled to 5.6 weeks’ statutory holiday a year.  This is made up of:

• 4 weeks’ leave derived from retained EU law, known as “Reg 13” holiday; and
• 1.6 weeks’ leave derived from UK law, known as “Reg 13A” holiday. 

The calculation of holiday pay – based on the meaning of a “week’s pay” - for each category of holiday differs:

• Reg 13 holiday: workers should receive “normal remuneration” during leave.  What elements of pay should be included in the calculation has developed in EU and UK case law over the years and has now been codified (see below). 
• Reg 13A holiday: pay is at the rate of a week’s pay for each week of leave.  This is based on a worker’s basic rate of pay calculated in accordance with complex provisions under the Employment Rights Act 1996.

From 1 January 2024, certain payments are expressly included within the definition of a "week's pay" for holiday pay purposes (to the extent that they are not already covered by the existing definition). This is intended to codify retained (assimilated) EU and UK case law on what should be included in holiday pay.

A week's pay for the 4 weeks’ Reg 13 holiday now includes:

• payments, including commission payments, intrinsically linked to the performance of tasks which a worker is obliged to carry out under their contract;
• payments for professional or personal status relating to length of service, seniority or professional qualifications; and
• payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

This amended definition will also apply to holiday for part-year and irregular hours workers when provisions relating to those categories of worker take effect (see below).

This amended definition of a week’s pay does not apply to the 1.6 weeks' Reg 13A holiday, which continues to be subject to the same, unamended definition of a week's pay.

The government intends, for now, to maintain the distinction between these categories of holiday.  In practice, many employers will want to use the same approach for both types of leave in order to simplify their processes and are therefore likely to apply the new definition of a week’s pay across the board. 

If an employer does wish to pay different holiday rates for different periods of leave, the Government guidance states that it should consider explaining this clearly and consistently to its workers, perhaps in the workers’ contract or staff handbook.

 

Carry over of holiday where the worker has been on family related leave or sick leave

The rules have now been amended to reflect previous European case law setting out the right for workers to carry over holiday from one leave year to the next in certain situations.

The two main situations where this will apply are:

• where a worker is unable to take some or all of their leave as a result of taking a period of statutory leave (such as maternity and other family-related leave); and
• where a worker is unable to take some or all of their leave as a result of taking a period of sick leave. The carried over leave in this situation must be taken within 18 months from the end of the leave year to which it relates.

These carry-over rights apply to the 4 weeks’ Reg 13 holiday but not to the additional 1.6 weeks’ Reg 13A holiday, with one exception: the right to carry over in situations of family-related leave applies to both, reflecting the current position from European case law.

For irregular-hours and part-year workers, these carry-over rights will apply to all of their holiday. There is also a provision that the worker and employer may agree in a "relevant agreement" (normally the employment contract) to carry over "part" of the worker's holiday to the next leave year. 

 

Carry over of holiday where the employer is in default

The new regulations include a right to carry forward holiday where, in any leave year, the employer fails to:

• recognise a worker's right to annual leave or paid annual leave;
• give the worker a reasonable opportunity to take leave or encourage them to do so; or
• inform the worker that leave not taken by the end of the leave year will be lost.

In these situations, the right to take the carried-over leave will last until the end of the first full leave year in which there is no such failure by the employer.

 

 

Changes for leave years on or after 1 April 2024

Rolled up holiday pay will be permitted for part-year workers and those with irregular hours

Holiday accrual for irregular hours and part-year workers has long caused practical headaches for businesses, with a perceived unfairness for part-year and some casual workers potentially having a greater holiday entitlement as a proportion of the hours they have worked.

“Rolled up” holiday pay means that the worker receives an additional amount of pay in respect of their holiday entitlement when they work, and they then do not receive any pay when taking holiday. 

Although the Government has recognised that rolled-up holiday pay can be a disincentive to taking leave, the latest changes permit rolled up holiday pay to be used for irregular hours workers and part-year workers.  Government guidance has defined these terms as follows:

• "irregular-hours worker": if the number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable (our emphasis).
• "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 (during the term of the contract) of at least a week which they are not required to work and for which they are not paid. 

Employers with atypical workers will need to consider whether any of their workers meet these definitions, which is not a straightforward exercise.  It is not yet clear, for example, how much variation to hours is required to meet the test of “wholly or mostly variable” in the definition of “irregular-hours worker”.

If a worker does not meet the above definitions, the position remains unchanged for them and rolled-up holiday is not permitted.    

 

Other changes applicable to part-year workers and those with irregular hours

Holiday entitlement
For leave years starting on or after 1 April 2024, these workers' holiday entitlements will be calculated in hours rather than weeks.  Holiday will accrue on the last day of each pay period, at the rate of 12.07% of the actual hours worked in that pay period.  The new calculation mechanism also imposes a cap of 28 days’ annual leave per year (equivalent to 5.6 weeks’ annual leave).

During a period of sick leave or statutory leave (such as maternity leave), an average over a 52-week reference period will be used to calculate the amount of holiday accrued.

This creates a single, unified holiday entitlement for irregular hours and part-year workers (known as “Reg 15B” holiday), and does not continue the distinction that currently exists between Reg 13 and Reg 13A holiday.  In other words, there is a new – third – category of holiday entitlement and pay which applies to part-year workers and those with irregular hours.

Holiday pay
Employers will be able to choose from two systems of holiday pay for part-year workers and workers with irregular hours:

1. Pay holiday pay when holiday is taken.  Pay will be calculated at the rate of a week's pay for each week's holiday (a “week’s pay” for these purposes being as set out above). Care will need to be taken to ensure that the correct average is taken for pay and hours. This should, in effect, produce an hourly rate of holiday pay that reflects the average hourly rate of pay over the last year.
2. Pay rolled up holiday pay. Under the new rules this is an uplift of 12.07% to the worker's remuneration for work done in each pay period. This is therefore a slightly different, and simpler, calculation than if holiday pay were being paid at the time holiday is taken. Such workers must be allowed to take their holiday, but will not be paid at the time they take it.

 

Suggested steps for employers

In light of these changes, employers should:

• consider the make-up of their workforce and, in particular, whether any of their workers may meet the definition of “part-year worker” or “irregular hour worker”.  If so, consider what changes need to be put in place to ensure compliance with the new rules;
• consider the system of holiday pay to be used for “part-year” workers and “irregular hour” workers (i.e. whether to pay rolled up holiday pay);
• review their existing holiday entitlement and pay calculations to ensure that they are in line with the new rules (for example, by ensuring that all the required elements of pay are included in the holiday pay calculation);
• review and, if necessary, update their provisions and practices relating to the carryover of leave;
• review and, if necessary, update all policies and documentation (contracts and staff handbook, etc) to ensure they are compliant with the new rules; and
• check that communication mechanisms are in place to ensure that workers are: (1) made aware of their holiday entitlement; (2) given a reasonable opportunity and encouragement to use it; and (3) are informed about carryover rules and when untaken holiday will be lost.

 

About the author

Kirsty Churm is a Legal Director in the Employment department. She advises both employers and senior employees on all aspects of employment law and employee relations issues, including contentious and non-contentious matters.