Reform of holiday rights: what employers need to know

Patrick Glencross

Senior Associate

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May 9, 2024

Categories Employment Law Updates

Calculating annual leave and holiday pay for any employees who work irregular hours can be challenging. The Government has this year introduced significant changes to the rules on holiday rights as part of its reforms to a range of employment rights that have developed from years of European and UK case law.

These changes were introduced with the stated aim of simplifying the rules on holiday entitlement and holiday pay calculations in the Working Time Regulations. They also address the perceived unfairness of a recent Supreme Court decision that gave a term-time worker more holiday when compared to someone who worked all year round for the same number of hours each year.

We highlight the changes and the importance of complying with the new rules, as well as outlining the benefits and how and when to take advantage of these.

What are the new rules?

Some of the new regulations clarify existing requirements, although there are some significant new rules.

Employers need to be aware of:

  • new definitions of an ‘irregular hours worker’ and a ‘part-year worker’. An irregular hours worker, such as a casual employee, is someone whose number of paid hours in each pay period is wholly or mostly variable. A part-year worker is someone who is required to work only part of the year, and has periods during the year which they are not required to work and for which they are not paid (e.g. term-time only employees).
  • a new method to accrue holiday entitlement in hours for irregular hours and part-year workers at 12.07% of actual hours worked in a pay period. The percentage will be higher if they are entitled to more than the statutory minimum annual leave.
  • a new method for calculating holiday entitlement for irregular hours and part-year workers when they are off sick or taking maternity leave or family-related leave.
  • an option to pay irregular hours and part-year workers ‘rolled-up holiday pay’: an additional sum for holiday as an uplift of 12.07% to their normal pay, instead of making a payment to the worker when they take leave and having to calculate their average pay.
  • confirmation of the right (developed through case-law) to carry over holiday into the next holiday year when it has not been possible for the worker to take it due to sickness or family-friendly leave, when the worker was denied the right to take leave, or the worker was not told that they would lose their holiday if they did not take it before the end of the holiday year;
  • confirmation of the requirement (similarly developed through case-law) to include certain payments such as regular overtime and commission in calculating holiday pay for statutory purposes.

Ensuring compliance

While the changes provide some clarity and simplify some areas, holiday rights remain complex. Now is a good time to take stock and ensure that your organisation compliant, for example by identifying which employees are irregular hours workers or part-year workers and by reviewing which payments are included in holiday pay calculations. A worker can bring an employment tribunal claim for past shortfalls in holiday pay.

Advantages of the new rules

The option to pay rolled-up holiday pay to irregular hours and part-year workers is simpler than calculating holiday pay based on average pay over the previous 52 weeks. Given the complexities of alternative methods, some employers had continued to use rolled-up holiday pay for casual and zero-hours contract workers even though this was decided to breach EU law, and could deter workers from actually taking their holiday.

Where employers are able to use the new rules, this will remove the risk of being challenged for paying rolled-up holiday pay.

How and when to take advantage of the new changes

Employers wishing to adopt the rolled-up holiday pay option can only do so:

  • where the worker meets the definition of irregular hours worker or part-year worker. Some casual workers, zero-hours workers, agency workers, and hourly-paid term-time workers are likely to fall within the definitions – but this will depend on the wording in their contracts and the exact working arrangements; and
  • in relation to holiday years starting on or after 1 April 2024. This means for workers whose holiday year runs 1 January to 31 December, the changes for irregular hours and part-year workers only come into effect on 1 January 2025.

Now is a good time to assess if you can and wish to use the new rules. We can support you in taking steps to implement the changes. Remember that this may involve changes to contracts, which may require you to obtain the worker’s agreement.

Practical steps for employers

It is important to:

  • check policies, contracts, and practices to ensure that they are compliant;
  • identify any workers who are likely to fall within the definitions of irregular hours or part-year workers;
  • decide if you wish to pay rolled-up holiday pay;
  • identify and introduce any contractual changes that need to be made to be compliant or to introduce rolled-up holiday pay;
  • adjust payroll systems to process the accrual of holiday in hours for irregular hours and part-year workers and payments;
  • ensure payslips itemise the element of rolled-up holiday pay; and
  • set up systems to remind employees to take their annual leave and make it clear that they must ‘use it or lose it’.

How we can help

While the changes go some way to simplifying the rules on holiday entitlement and pay, they leave some areas of complexity and uncertainty in the Working Time Regulations unresolved, for example the different rules when calculating holiday pay for the basic entitlement of 4 weeks’ holiday and the additional entitlement of 1.6 week’s holiday. The changes also bring in some subtle differences between the rules that apply to irregular hours and part-year workers and those that apply to other workers, for example how overtime payments and allowances should be included in calculating holiday pay. Another area of complexity is ‘carry forward’: there are variations in the amount of holiday that can be carried forward and for how long, depending on the circumstances.

To support you, we can:

  • set down the detail in clear and concise holiday policies;
  • assess your additional payments to staff, such as commission and overtime and advise on which you need to include in calculating holiday pay and when;
  • advise you on which workers come within the new definitions of irregular hours or part-year workers;
  • check contract wording to ensure it is compliant;
  • advise you on implementing contractual changes, to avoid breaching contracts;
  • draft new contracts to maximise the chance that those workers and new workers come within the new definitions so you can pay rolled-up holiday pay.

Contact Patrick Glencross, Senior Associate, on 01227 763939 to find out more.

Please note: This article is for general information only and does not constitute legal or professional advice.