Holiday pay and accrual in 2024

On 9 November 2023 the Government published the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (the Regulations) which will come into force on 1 January 2024.

The Regulations are in response to the consultation that was conducted at the start of the year and over the summer in which proposals were put forward to make changes to the way in which holiday pay is calculated and accrued under the Working Time Regulations 1998.

The Regulations will:

• allow employers to ‘roll-up’ holiday pay for irregular and part year workers
• introduce accrual of leave entitlement for irregular and part year workers
• specify what needs to be taken into account when calculating holiday pay in relation to four weeks’ entitlement
• provide for carry over of holiday entitlement in certain circumstances.

Rolled-up holiday pay

The term ‘rolled-up’ holiday pay refers to the practice of paying an employee’s holiday pay as a separate added on allowance on top of their regular wages. The practice was found to be contrary to the EU Working Time Directive back in 2006 when the European Court of Justice held that payments for holiday should be made as at the same time that holiday was taken or it might otherwise discourage workers from taking time off (i.e. as they would have already received the holiday pay they may decide to work without any time off to maximise their pay). In practice, despite this decision, the fact that in any claim for holiday pay credit had to be given for the amounts actually shown to be paid meant that many employers continued rolling-up the entitlement particularly where the work pattern varied.

The Regulations will provide a statutory footing to allow for rolled-up holiday pay for holiday years from 1 April 2024 but only for irregular hours or part year workers and on the condition that the pay calculation is set at 12.07% of all pay for work done.

It will also be a requirement that the extra amount reflecting holiday pay is clearly identified on the worker’s pay slip which is clearly important to establish that the correct additional amount has been paid.

The additional amount is to be calculated at 12.07% of the wages due and is based on the worker’s entitlement to 5.6 weeks’ holiday under the Working Time Regulations 1998.

Similarly, there is also a new annual leave accrual system for irregular and part year workers that applies the 12.07% calculation to reflect that these workers have an entitlement to holiday that accrues with the amount of work that they undertake up to a maximum of 5.6 weeks, i.e. 28 days.

The Regulations are based on these workers only having statutory holiday rights as the calculations will not work if they have an enhanced entitlement to further holiday in their contract.

This does reflect the terms on which the vast majority of irregular and part year workers are engaged and, in many cases, will represent how employers have been applying holiday entitlement to them in practice, despite it being technically in breach of the legislation.

The key point will be that the change in legislation will address the problem that was highlighted in the case of Harpur v Brazel 2021 where the Supreme Court found that the Working Time Regulations 1998 do not allow for annual leave entitlement to be lawfully pro-rated downwards to reflect only part year working. As part year workers will only accrue holiday entitlement in accordance with time worked, the problems highlighted in that ruling will no longer apply.

However, it will need to be taken into account that under the new accrual of leave rules those workers who are absent due to sickness or on statutory leave will still accrue holiday entitlement by reference to the average hours that they have worked during the year.

Carry forward of holiday entitlement

European case law has established that the prohibition on carry over of leave entitlement in the Working Time Regulations 1998 is not compatible with the aims of ensuring that workers are not deprived of their rights to paid holidays when they have been unable to take them.

The draft regulations put this on a statutory footing in that the whole 5.6 weeks’ statutory annual leave entitlement can be carried forward into the next holiday year if it has not been taken due to the individual having been on family leave. In addition, the four weeks’ annual leave as originally granted under EU law can be carried forward if it was not taken due to sick leave and may be taken within 18 months of the end of the holiday year in which the entitlement originally arose.

The Regulations also provide that up to four weeks leave may be carried forward where the employer fails to:

• recognise their right to paid annual leave (because, for example, they are wrongly classed as a self-employed independent contractor);
• give them a reasonable opportunity to take leave or encourage them to do so; or
• warn them of the risks of losing their annual leave entitlement at the end of the holiday year.

In these situations there will be a right to carry forward the four weeks leave until the end of the first full leave year in which the rights are recognised or granted. In the case of an individual who has been misclassified as not being a worker, that means the entitlement to four weeks’ holiday pay may accrue over a number of years.

Holiday pay calculations

Over the years, disputes relating to what should be included in the calculation of holiday pay have led to a number of high profile court decisions. The Regulations attempt to codify the outcome of those decisions by expressly providing the elements of pay that should be taken into account.

The amount paid must reflect not only basic pay but also any payments, including commission payments, which are intrinsically linked to the performance of tasks which the worker is obliged to carry out under the terms of their contract.

Payments for professional or personal status relating to length of service, seniority or professional qualifications will also need to be included as will any other payments, such as for overtime, which have been regularly paid to the worker in the previous 52 weeks.

However, the Regulations stipulate that the requirement to take into account these payments will only apply for four weeks’ leave, that derived from the EU, any further leave may be paid in accordance with the contract terms which may just limit payment to basic pay.

Some may decide that the administrative burden of carrying out two sets of calculations is commercially not viable and pay all the holiday taking into account the specified payments in the Regulations. Those that don’t and carry out separate calculations will need to carefully specify when the four weeks is being taken in the contract of employment as recent case law has established it should be treated as one pot with no default rule or presumption that it will be the first four weeks of holiday taken.