Changes to holiday pay

The government has tried to improve the position for employers regarding the calculation of holiday pay and entitlement by simplifying the rules and restating principles derived from EU Law without reducing UK workers’ existing rights, particularly in relation to part-year and irregular hours workers.

When are the changes set to come into force?

The new regime for irregular hours workers and part-year workers will apply to leave years beginning on or after 1 April 2024.

What isn’t changing?

The government has dropped its original plans to merge the two categories of holiday entitlement (EU-derived leave and UK-leave) into one single pot of 5.6 weeks, meaning that employees continue to be entitled to:

• 4 weeks’ leave paid at normal pay (EU-Derived leave); and
• 6 weeks’ leave (based on UK law) paid at basic pay (Additional UK Leave).

The position regarding carry-over of holiday remains so that workers may carry untaken holiday over to the next leave year where:

• a worker was unable to take their leave due to statutory leave including maternity, adoption, shared parental leave;
• a worker was prevented from taking leave due to sickness (in such case, EU-Derived Leave can be carried, but this must be used within 18 months of the end of the leave year in which it was accrued);
• an employer has failed to recognise a worker’s statutory right to take leave or pay them for it (EU-Derived Leave);
• an employer has failed to provide the worker with a reasonable opportunity to take their entitled leave or has failed to encourage them to take such leave (EU-Derived Leave); or
• an employer has failed to inform a worker that such leave will be lost if not taken by the end of the leave year (EU-Derived Leave).

Except for cases where the worker was prevented from taking leave due to sickness, the leave must be used by the end of the first full year in which none of the above conditions exist.

The new holiday regime for irregular hours workers and part-year workers for leave years starting on 1 April 2024 will also incorporate these carry-over rights.

What is changing?

New definitions of irregular hours and part-year workers

The Regulations provide new definitions of irregular hours and part year worker.

• a worker is an irregular hours worker, if under the terms of their contract, the number of paid hours that they will work in each pay period during the term of their contract in that year is, wholly or mostly variable.
• 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 (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.

Rolled-up holiday pay for part-year and irregular hours workers

Rolled-up holiday pay is the practice of paying an employee’s holiday pay at the same time as basic pay. Under EU law, rolled-up holiday pay was ruled unlawful because of the risk that it would discourage workers from taking time off. Despite this, many UK employers continued to use it due to the difficulties in calculating holiday entitlement for casual workers.

Whilst it will not be mandatory for new leave years beginning on/after 1 April 2024, the Regulations will allow rolled-up holiday pay provided that:

• The worker is an irregular hours or part-year worker;
• Holiday pay is calculated as 12.07% of all pay for work performed;
• The 12.07% is paid at the same time as pay for the work performed; and
• Rolled-up holiday pay is itemised separately on payslips.

Key points for employers

• Ensure workers are correctly classified (rolled up holiday is only available for irregular hours or part year workers).
• Rolled up holiday pay doesn’t give the option of distinguishing between different types of leave / paying at different rates – it must be paid on all earnings.
• If the worker’s leave year begins on 30 March 2024, these provisions will not have effect until 30 March 2025.
• Rolled-up holiday pay is not an alternative to leave – employers are still under a duty to make sure that workers take at least 5.6 weeks’ off to rest.
• If employers intend to start using rolled-up holiday pay, first check the workers’ contracts in case this amounts to a variation of contract.

Holiday accrual for irregular hours works and part-year workers

The Regulations allow irregular and part-time workers to accrue annual leave on the last day of each pay period – at the rate of 12.07% of the actual hours worked (subject to a maximum of 28 days per year).

The accrual rate of 12.07% is statutory annual leave entitlement (5.6 weeks) expressed as a percentage of the number of potential working weeks in a year (46.4 weeks). If the worker has a contractual right to more holiday than the statutory minimum, the percentage will be different ((total entitlement ÷ remaining working weeks in the year) x 100).

This change is designed to correct some of the flaws identified by the Supreme Court in Harpur v Brazel. Whilst the original consultation paper proposed a system based on average hours worked over a 52-week reference period, the system adopted is simpler. However, an average over a 52-week reference period will still be needed to calculate holiday accrual for such workers who are on sick leave or statutory leave (regardless of whether they are irregular hours or part year workers).

The Regulations therefore provide employers with the following options for irregular and part-year workers:

• pay rolled-up holiday pay (i.e. a 12.07% uplift for the worker’s remuneration for work done in any given pay period) and allow them to take their leave; or
• pay holiday pay when the holiday is actually taken, calculating the hourly rate with the new payment formula set out in the Regulations. A calculation is required each time a worker takes holiday and this is likely to be an administrative burden.

Covid-19 exception

Emergency legislation that was introduced to relax the carry-over rules due to the impact of Covid-19 has been repealed from 1 January 2024. Workers who have untaken carried-over holiday under the Covid-19 provisions on 1 January 2024 will have until 31 March 2024 to use it (or lose it).

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