How to prepare for new holiday pay rules

Holiday pay for irregular hour and part year workers has been a hot topic on the employment and Government agenda in 2023. With not one, but two, consultations issued by the Government this year, a response has finally been issued and draft regulation supplied that offers some clarity to employers – although these are subject to Parliamentary approval so could still change.

Currently, under the draft regulation, employers will be able to pro-rate holidays for irregular hours and part-year workers based on 12.07% of hours worked in the pay reference period. This reverses the Supreme Court’s decision in the Harpur Trust v Brazel case from 2022 which found that the application of the 12.07% formula was unlawful.

The use of rolled up holiday pay for such workers will also now be legitimised. This involves adding an uplift of 12.07% to the normal rate of pay for irregular hours and part-year workers – as opposed to paying holiday pay at the time that the holiday is actually taken. Previously, this practice was unlawful but had continued in some industries.

This will only apply to any leave years that start on or after 1st April 2024. Until then, the findings in the Harpur Trust v Brazel decision are still relevant to such workers leaving employers still at risk of back-pay claims as the draft regulations will not be retrospective.

Whilst it had been suggested that Working Time Directive (WTD) and Working Time Regulation (WTR) leave could be combined into one single pot of annual leave, the consultation response also confirmed that the distinction between the two will remain and that the 4 weeks’ leave (Regulation 13 leave), which derives from the WTD, should be paid in line with normal rather than basic remuneration.

Further, the WTR will be amended to state exactly what needs to be included within a week’s pay including commission payments and other payments which are intrinsically linked to the performance of tasks a worker is obliged to carry out. The additional 1.6 weeks (Regulation 13A leave) will continue to be calculated based on a “weeks pay” as defined in the Employment Rights Act 1996.

Amendments will also be made to the WTR to maintain the current position on carry over where a worker is unable to take holidays due to statutory leave, such as maternity leave. That leave will carry forward into the next holiday year. The carry over where a worker is unable to take it due to sick leave will continue to apply in respect of Regulation 13 leave with the current limitation of 18 months. In addition, carry over of Regulation 13 leave will be required where an employer has failed to recognise that worker’s right to Regulation 13 leave or to payment in respect of it, the classic example being where worker status is in dispute, to afford the worker a reasonable opportunity to take the leave or to encourage them to do so or has failed to inform the worker that leave which cannot be carried forward will be lost.

If the legislation becomes law in its drafted form, it will apply from 1st January 2024 albeit in respect of leave years falling on or after 1st April 2024, leaving little time for employers to update practices.

Lesley Rennie, Principal Employment Solicitor at WorkNest, explains what first steps businesses should be taking to help them become compliant with the new draft regulations:

“The Government exercising its power to maintain the status quo in respect of certain EU derived holiday rights provides some much needed certainty for businesses. Otherwise, holiday pay rights would have been in a state of flux until we had judicial clarity.

“The draft regulation also marks a return to the much favoured 12.07% accrual formula which many employers had continued to apply in respect to irregular hour and part-year workers.

“However, the Regulations are not without their difficulties. They are complex and appear to create a new category of worker – the “irregular” or “part-year” worker. Those terms are defined in the draft regulations but the definitions are far from perfect. A worker will be an “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 leave year is, under the terms of their contract, wholly or mostly variable. What constitutes “wholly or mostly variable” remains to be seen as does whether the “terms of the contract” means only the written terms of the contract as opposed to what actually happens in reality.

“As the roll back to the 12.07% accrual formula and use of rolled up holiday pay applies only in respect of workers falling within these definitions, miscategorising a worker could result in a breach of the WTR and potential underpayment of holiday pay.

“Further Government guidance on the meaning of these terms so that businesses can fully understand and prepare would be welcomed.

“However, with the information we do have, a sensible first step for employers is to audit their workforce to identify which workers, if any, could be classed as being an “irregular” or “part-year” worker.

“Advice should be sought on any specific cases where it is not immediately clear whether a worker falls within either of these categories.

“From there, businesses can decide whether or not to utilise rolled up holiday pay and assess what, if any, changes are required to the existing contracts of employment to permit for this.

“Consideration should also be given to existing leave tracking and payroll software to ensure that these can accommodate a 12.07% accrual for such workers and the use of rolled up holiday pay.”

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