Changes to calculating holiday pay

Key changes to holiday pay in 2024

The Government have introduced a series of significant modifications to the existing regulations concerning holiday pay. This blog post will serve to navigate employers through the changes.

The principal amendments, effective for holiday years commencing from April 1st, 2024, onwards, include:

1. Re-introduction of rolled-up holiday pay for irregular hours and part-year workers;
2. Re-introducing the 12.07% of hours worked calculation method for irregular hours and part-year workers;
3. Amendments to the definition of a week’s pay for holiday pay calculations;
4. Changes to carry over of holiday rules.

Statutory holiday pay – the basic right

Workers in Great Britain (other than irregular hours and part-year workers for holiday years beginning on or after 1 April 2024 for who separate entitlement provisions apply) have a statutory entitlement to 5.6 weeks of paid annual leave under the Working Time Regulations 1998 (‘WTR 1998’). It is important to recognise at the outset that this comprises two elements: 

• A basic entitlement to four weeks’ annual leave under WTR 1998, reg 13, and
• An additional entitlement to 1.6 weeks’ annual leave under WTR 1998, reg 12A

The basic entitlement was the UK’s implementation of the four-week minimum amount of paid annual leave required under EU law, namely under Article 7 of Directive 2003/88/EC, the Working Time Directive (WTD). The additional 1.6 weeks is found in UK domestic law only. This distinction is important because: 

• Before January 1, 2024, cases from the Court of Justice of the European Union (CJEU) on paid annual leave generally impacted only on how tribunals and courts had to interpret and apply the basic four-week entitlement, and
• On and after 1 January 2024, as a result of Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, different provisions apply to the basic and additional entitlements in relation to calculating holiday pay, namely the former is to be paid at ‘normal pay’ while the latter can be paid at ‘basic pay’

As a result, in some scenarios, holiday pay may differ depending upon whether it is in respect of: 

• The basic entitlement (normal pay)
• The additional entitlement (basic pay), or
• Entitlement under the contract of employment which is over and above the statutory entitlement

However, on a day-to-day basis, most employers will usually, as a matter of administrative convenience, simply choose to calculate a worker’s holiday pay in the same way for each type of paid leave. This will mean adopting the most generous calculation which will usually be the calculation required for the four weeks that form basic entitlement under WTR 1998, reg 13.

The government guidance accompanying the 1 January 2024 changes notes that: 

• The regulations do not state which entitlement should be used first
• Many employers choose not to distinguish between the two pots of statutory leave, and to pay the entire 5.6 weeks at the ‘normal’ rate of pay
• If an employer wishes to pay different holiday rates for different periods of leave, then it’s recommended that they consider outlining this clearly and consistently to their worker, for example in the worker’s contract or staff handbook

Distinction between ‘normal working hours’ and ‘no normal working hours’

Due to recent case law advancements and statutory amendments effective from 1 January 2024, the way in which workers are categorised is now of less practical significance than it used to be, at least in respect of calculating pay for the four weeks’ basic entitlement under WTR 1998, reg 13. This is because the amendments ensure that holiday pay calculation for these four weeks remains consistent irrespective of whether or not the worker has normal or no normal working hours.

Re-introduction of rolled-up holiday pay for irregular hours and part-year workers

Traditionally, many employers’ preferred practice for casual workers was to “roll up” holiday pay into the basic rate of pay for work done. This streamlined the calculation and disbursement of holiday pay for individuals with irregular working hours who might not naturally schedule or take time off.

A 2006 legal case determined that the practice of rolled up holiday pay was contrary to EU law as it was paying holiday up front and could deter workers from actually taking holiday and therefore having adequate rest. Consequently, Government guidance evolved over time to align with this legal precedent, recommending that employers discontinue this practice.

The recent Government consultation acknowledged that, in practice, rolled-up holiday is still heavily used in a variety of sectors as a simple way to calculate holiday pay for workers who work irregular hours or zero-hours contracts.

Whilst it has acknowledged the concern that rolled-up holiday pay may disincentivise workers from taking holiday, the consultation says that it believes other safeguards are a proportionate means of addressing these concerns.

The newly enacted legislation therefore confirms that for holiday years from 1 April 2024, holiday pay can now be rolled-up for these irregular hours and part year workers only (please see below for more information regarding this change).

If employers elect to pay rolled-up holiday pay, they will need to apply an uplift of 12.07% to the workers’ pay for work done in each pay period. Payments for rolled-up holiday pay must be clearly delineated on workers’ payslips, and the payment system must be transparent. Again a 52-week averaging system will apply for workers on sick leave or statutory leave such as maternity leave.

Employers should recognise that while they can opt for rolled-up holiday pay, they must still provide these workers with the opportunity to take their holiday entitlement in practice, regardless of the rolled-up payments.

It’s also important to understand rolled-up holiday pay can only be paid for “irregular-hours workers” and “part-year workers only”. Whilst the Government consulted on whether this should be extended to all workers, this was expressly not included in the new legislation.

New calculation method for holiday entitlement of 12.07% of hours worked for irregular hours and part-year workers

There are two key changes affecting the calculation of holiday pay for “irregular hours workers” and “part-year workers”. New sections will be inserted into the Working Time Regulations 1998 (WTR) dealing specifically with these workers, which will provide:

• A new holiday entitlement system wherein holiday accrual will be based on 12.07% of the hours worked by the individual in the previous pay period;
• The right for employers (if they wish to use it) to implement rolled-up holiday pay. This means that holiday pay for these workers can be paid as an uplift of 12.07% to the normal rate of pay at the time work is done, instead of being paid at the time holiday is taken.

The 12.07% calculation method for holiday entitlement effectively converts the UK statutory holiday entitlement for full time workers of 5.6 weeks holiday (28 days including the 8 public holidays) into a percentage of holiday against working time (5.6 weeks / (52 weeks – 5.6 weeks) = 12.07%).

This method was commonly used by employers until a series of EU cases, culminating in the recent Harper Trust case, which determined that part-year workers should not have their holiday entitlement pro-rated. Consequently, they should receive the full 5.6 weeks’ full-time entitlement even if they only work part of the year.

In relation to part-year workers, this change therefore represents a deliberate reversal of the Harper Trust decision confirming that for leave years from 1 April 2024 employers can calculate holiday entitlement for part-time workers on a pro-rata basis using the 12.07% calculation method. The same principles can also now apply to irregular hours workers, again making their holiday entitlement easier to calculate.

Key for employers will be identifying the workers that will fall under these provisions. Under the draft legislation:

• an “irregular hours worker” is someone whose hours in each pay period are wholly or mostly variable under the terms of their contract;
• a “part-year worker” is someone who is only required to work part of the year under their contract and who has periods within the year of at least a week where they are not required to work and are not paid.

It is likely that there will be future legal challenges as to whether individual working arrangements fall within the definition of an “irregular hours worker” once the new rules come into force, for example, where employees work regular hours in some parts of the year, and irregular hours in busier periods.

Holiday entitlement for these workers will be calculated in hours and will accrue on the last day of each pay period at a rate of 12.07% of the actual hours worked in that period. For most workers, this can be easily calculated using this method.

In cases where an individual has periods of absence throughout the year (e.g., maternity leave) and the 12.07% method is impractical, their holiday accrual will need to be calculated over a 52-week reference period.

Employers will be able to choose from two systems for paying for this holiday pay – they can pay it when holiday is taken, calculated at the rate of a week’s pay for each week’s holiday as they would regular hours or full year workers, or they can pay this as rolled-up holiday pay as detailed above.

Changes to the definition of a week’s pay for holiday pay calculations

The other area of contention for holiday pay for some time has been what additional payments holiday pay should include. A series of EU cases debated whether payments like regular overtime, commission, bonus and call out or similar payments should be included when calculating holiday pay. EU case law determined that holiday pay should not be based solely on basic pay, but on the normal pay received by the worker.

This case law prompted changes in UK legislation, extending the calculation period for holiday pay for employees whose pay varies based on work done or hours worked to 52 weeks. This means that holiday pay should generally reflect the average hourly rate of pay over the preceding 12 months.

The new rules aim to restate and codify these principles. Confusingly for employers, however, although holiday pay will no longer be governed by EU rules and principles, the new legislation will continue to differentiate between the 4 weeks’ statutory holiday that the EU laws have historically guaranteed as a minimum holiday entitlement and the extra 1.6 weeks the UK guarantees to workers as a minimum holiday entitlement on top of this (known as regulation 13A holiday).

Under the new rules, there will still be two calculation methods. Holiday pay for the initial 4 weeks of statutory holiday (and all holiday pay for irregular hours and part-year workers) must be calculated based on the new “normal remuneration” provisions. These provisions now explicitly outline the types of payments to be included in these calculations:

• Payments including commission payments which are intrinsically linked to the performance of tasks which the worker is obliged to carry out under their contract;

• Payments for professional or personal status relating to length of service, seniority, or professional qualifications;
• Payments such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

The remaining 1.6 weeks statutory holiday will continue to be subject to the old definition of a week’s pay which is set out under the Employment Rights Act 1996 depending on whether the worker works normal working hours and other factors.

Changes to carry over of holiday rules

The rights in relation to carry over of leave from one year to the next will also be codified in UK law. These rights have previously only been set out under EU case law and therefore have been harder for employees to understand and enforce in practice.

Carry over due to family leave or sickness absence

EU case law established that if a worker is unavoidably prevented from taking holiday due to statutory family leave, such as maternity leave, they can carry over their holiday entitlement to the subsequent holiday year. The UK legislation now confirms this provision, allowing workers in such circumstances to carry over statutory leave into the following year. The same rules will apply for carry over of leave in the case where an employee has been unable to take leave due to sick leave. This leave can be carried over for a maximum period of 18 months after the holiday year, which broadly reflects the existing EU position.

Carry over where employer has failed to allow holiday to be taken

New rules will also provide that if an employee has not been able to take paid holiday because:

• Their worker status has been denied by the employer (i.e. the employer has incorrectly classed them as self-employed); or
• Their employer has failed to provide them with a reasonable opportunity to take leave or to encourage them to do so; or
• Their employer has neglected to inform the worker that failure to take leave will result in its forfeiture;

they will be entitled to carry over 4 weeks’ holiday per year. This again largely restates the EU position. In all these cases the holiday leave can be carried over every year unless and until the employer corrects the failing.

Final Remarks

In essence, this underscores the heightened importance for employers to:

• Thoroughly evaluate the employment status of all individuals within the organisation.
• Establish robust systems and documentation that clearly communicate the right to take holiday, actively encourage employees to utilise their entitlement throughout the year, and explicitly outline the risk of forfeiture if holiday remains untaken.

These represent the most substantial alterations to holiday pay regulations in quite some time. While the proposed allowance for rolled-up holiday pay for casual workers is likely to be beneficial and well-received by employers, other aspects of the changes are more intricate and may pose novel challenges and inquiries for employers.

Given the potential complexities involved, it is imperative for employers to stay informed about these changes and take proactive measures to strategize their implementation promptly.

If you are an employer looking for guidance or clarity on calculating holiday pay for your work force, please contact us for specialist employment law advice. 

Contact us now for a free 15-minute consultation on 0330 221 0684 or e-mail us at [email protected].

By Suraj Purohit.

Employment Paralegal at Kalra Legal Group.