The Government has announced further changes to how businesses should calculate annual leave payments for employees who work inconsistent hours or only work part of the year.

The government previously consulted regarding the laws on holiday in two consultations, firstly, on retained EU employment law reform and secondly, calculating holiday for part-year and irregular hour workers. It has now published its response to these shortly followed by the draft Employment Rights Regulations (ER Regulations) amending the Working Time Regulations 1998 (WTR). Although still in draft form, once passed the ER Regulations are due to come into force on January 1, 2024, and the new regime for irregular hours workers and part-year workers will apply in respect of any leave years beginning on or after April 1, 2024.

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For some businesses, this may cause frustration as rules around holiday calculations had only previously been changed just last year, following the Brazel Vs Harpur Trust case, which saw the abolishment of the 12.07% calculation. This ruling meant that part-year workers must receive the equivalent of 5.6 weeks of annual leave (minimum), and rather than using the 12-week reference period, this was increased to an average over the last 52 weeks of work, discounting any weeks with no pay. To achieve this, employers were required to go back by up to 104 weeks to make sure the average holiday pay was based on 52 weeks of paid work. In short, if an employee only worked part way through a year, they would still receive 5.6 weeks of annual leave pay.

The implementation of this ruling led to huge amounts of confusion and administrative burden for employers and led to calls of unfairness as part-year workers were entitled to a larger holiday entitlement than part-time workers who were working the same total number of hours across the year.

Thankfully, the government has recognised this disparity and has worked to ensure both holiday pay and entitlement will be proportionate to the actual hours worked, whilst simplifying calculations for employers.

It is essential to ensure you are aware of the changes and when they happen.

Key changes

  • Clearer definition of what is to be included in “normal remuneration” for the purposes of calculating holiday pay for Working Time Directive holiday entitlement.
  • Re-introduction of the annual leave accrual method of 12.07% of hours worked for part-year and irregular-hours workers.
  • Allowance of rolled-up holiday pay in certain circumstances.
  • EU case law permitting carry-over of annual leave where the worker has been on maternity/family-related leave or sick leave will be restated in UK law.
  • Express carry-forward provisions will be introduced to cover situations such as where an employer fails to give a worker a reasonable opportunity to take holiday in a leave year.

Changes to Average Holiday Pay from 01 January 2024

New definition of normal remuneration and what it applies to:

All workers are entitled to a minimum of 5.6 weeks of statutory leave per holiday year. The statutory annual leave provision of 5.6 weeks (28 days) stems from both the European Working Time Directive and the UK Working Time Regulations. The first 4 weeks (20 days) comes from the former and the other 1.6 weeks (8 days) from the latter. These 8 days correspond to the usual UK bank holidays but do not have to be taken on the specified date.

It had been hoped this would be simplified, with one pot of annual leave created, however, this unfortunately has not happened, meaning there will continue to be different methods of calculating pay for these two periods of leave.

As it stands, the first 4 weeks of leave from the European Working Time Directive, dictates that payments of holiday paid at “normal pay”, and the additional 1.6 weeks from the UK Working Time Regulations should paid at the basic rate of pay.

So, what is considered normal pay?

Thankfully, we have been provided with a statutory definition of what amounts to normal pay under the ER Regulations and will be defined in the WRT to include:

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

There remain grounds of uncertainty in respect of whether payments are intrinsically linked to the performance of tasks, or whether they have been paid with sufficient regularity and so the tribunals and courts will continue to address residual uncertainty.

Distinguishing between the two aspects of annual leave can be complicated and so, for the sake of simplicity, many employers will calculate the entire 5.6 weeks in the same way rather than separating the two entitlements into two different levels of pay.

Remember, these definitions apply from 01 January 2024 and you must ensure you are prepared for these changes to take effect.

Changes applying to holiday years starting on or after 1st April 2024

Key dates and information to note:

Employers must note that these changes apply to leave years starting on or after 01 April 2024.
Employers who operate annual leave in line with a calendar leave year will not be able to take advantage of rolled up holiday pay until 2025.
Employers will need to consider whether the introduction of rolled up holiday pay would be a contractual change and should start planning ahead.

The calculation for part-year or irregular-hours workers

**Please ensure to refer to the definition of part-year and irregular-hours workers below.

Employers will be permitted to calculate holiday, for part year and irregular hours workers using the accrual method of 12.07% of the hours worked in a pay period.

This will likely bring frustrations based on the work that went into abolishing this method but will also bring sighs of relief that the calculation (and administrative burden) has been reviewed and somewhat simplified. We expect these changes will impact the majority of employers.

The Government proposes that statutory annual leave entitlement for part-year workers and workers with irregular hours should be calculated by employers using following two steps:

  • Calculate the total hours a worker has worked in the previous 52 weeks (the reference period), including those weeks without work;
  • Multiply the total hours worked by 12.07% to give the worker’s total annual statutory holiday entitlement in hours.

Previously, as mentioned above, employers were required to ignore weeks without work and extend the reference period to 104 weeks to enable them to find 52 full weeks of work.

Due to rounding up, using 12.07% will result in an entitlement that is 0.002% over the statutory minimum, which may help to mitigate the risks to business of underpayment of holiday pay. Employers would need to adjust the percentage to account for additional contractual leave (leave in excess of the statutory minimum of 5.6 weeks).

Rolled-up holiday pay

Up until these changes were announced and since 2006, it had not been permissible to “roll up” holiday pay into basic pay, i.e. pay an employee a higher hourly, daily, or weekly wage, part of which is designated as holiday pay, with the result that, when the employee goes on leave, they receive no pay.

However, the government will now also legislate to allow rolled-up holiday pay for some workers in defined circumstances whilst ensuring the holiday pay remains proportionate to the hours actually worked. This will allow employers to include an amount for holiday pay on top of the hourly rate in regular pay periods.

Rolled-up holiday pay will return for part-year workers, irregular-hours workers and some agency workers only.
This change has raised a mixed response as some feel it may disincentivise workers from taking leave, however, the government considers existing safeguards proportionate in addressing these concerns.

Rolled-up holiday pay will only be acceptable where:

  • The pay is calculated at 12.07% of the hours worked.
  • The 12.07% is paid at the same time as the work is done.
  • and that the holiday pay is clearly itemised on the worker’s payslip.

Definitions of workers

The categories of irregular hours and part-year workers have been newly defined.

  • Irregular hours – those workers whose contractual hours are wholly or mostly variable.
  • Part-year (including term time) – those workers whose contractual hours require them to work part of the year only with periods of the year during which they are not required to work and therefore unpaid (in circumstances where there is a gap of at least a week in which they are not required to work). Simplified, this means it will be possible to pro-rate holiday entitlement for term-time-only workers.

Both categories will be entitled to accrue 5.6 weeks of holiday from the start date of employment, calculated at the rate of 12.07% of the hours worked in the preceding pay period.
It is important to ensure you review employment contracts to determine if the above definitions apply. Particularly, there may be some uncertainty over the definition of ‘mostly variable’. If you are unsure, advice should be sought.

EU case law permitting carry-over of annual leave where the worker has been on maternity/family-related leave or sick leave will be restated in UK law

The Working Time Regulations will be amended to expressly allow for the carryover of annual leave where a worker has been unable to take leave because of absence due to maternity/family/sickness absence.

Any leave would be lost if not taken within 18 months of the end of the leave year to which it relates.

We also see the introduction of an annual leave accrual method for part-year or irregular-hours workers when they have had periods of family or sick leave.

Express carry-forward provisions will be introduced to cover situations such as where an employer fails to give a worker a reasonable opportunity to take holiday in a leave year.

The last important change to note is that workers will be given the right to carry forward holiday where, in any leave year, an employer fails to:

  • Recognise a worker’s right to annual leave or pay for annual leave
  • Inform the worker that any leave not taken by the end of the leave year will be lost
  • Provide the worker with reasonable opportunity to take the leave they are entitled to, or failure to encourage them to take the leave

Often, employers will allow workers to carry forward five days to the next holiday year. Some miss that this should only be permitted where the worker is contractually entitled to more than the statutory minimum of 5.6 weeks. Whereas this change provides workers with new rights to be able to carry over leave (with no maximum amount) if an employer is at fault for them not taking their leave.

During the pandemic, the WTR was amended to ensure workers did not lose annual leave due to the effects of coronavirus. This change allowed workers to carry over four weeks of leave into the following two leave years if it was not reasonably practicable to take it in the year to which it related.

Most workers in this situation will have used up the additional leave accrued in this way already, depending on the timing of the Company’s leave year. However, this provision will be removed from 01 January 2024, meaning we return to the pre-pandemic position, where workers can no longer accrue covid-related carry-over leave. As a transitional measure, workers who still have leave accrued before 1st January 2024 will be permitted to use it on or before 31 March 2024.

Holiday Accrual

Other workers will continue to accrue annual leave in their first year of employment as they do now by receiving (or being entitled to) 1/12th of the statutory entitlement (or higher if your contract allows).

What do employers need to do now:

As employers, there are numerous checks you need to undertake to ensure you are up to date with this new legislation and to ensure you do not fall behind and become caught out.
We would recommend that you assess your workforce to determine what category certain workers may fall within, such as part year or irregular hours workers. You should also consider whether you are considering the correct elements regarding normal pay.

Furthermore, you should check your employment contracts and internal processes to ensure compliance and consider whether you need to make any changes. Finally, ensure you have a process to ensure workers are reminded to take their accrued holiday to limit carry-forward amounts.

The subject of annual leave can bring a shudder to many employers, but rest assured, our expert HR Consultants can support you in implementing these changes and finding the appropriate balance for your organisation.