And so Brexit begins: Important proposals for reform of holiday pay, annual leave, record keeping, and TUPE

Last week the Government released snappily titled, The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (“the Regulations”). The Regulations are a draft Statutory Instrument containing material amendments to the Working Time Regulations 1998 (“WTR 1998”) and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE 2006”). The Regulations are set to come into force on 1 January 2024 and are made pursuant to the Retained EU Law (Revocation and Reform) Act 2023 (“the 2023 Act”).

Context

As some readers may recall, this is not the first time this year that the WTR 1998 and TUPE 2006 have been the subject of change and uncertainty. As previously reported in our blog post here, the 2023 Act was for some time set to revoke all EU-derived secondary and retained direct EU legislation at the end of 2023, except where expressly retained. This proposal placed the very existence of the WTR 1998 and TUPE 2006 as part of UK law in direct jeopardy. However, the Government ultimately performed a U-turn and reversed its position (see our blog post here), meaning that all retained EU law would remain binding in the UK except where expressly repealed; these Regulations are the start of this ‘expressly appealed’ process.

The basic effect of the Regulations is to propose a series of amendments to the WTR 1998 and TUPE 2006, which are helpfully accompanied by the Government’s published consultation response. The proposed amendments can be categorised into four key areas, as follows:

1. Clarity on the requirement for record keeping in relation to working time.

Regulation 9 of the WTR 1998 provides that an employer must keep ‘adequate’ records of the hours worked by staff to demonstrate compliance with the limits on working time as provided for under the WTR 1998. The European Court had determined that the record keeping requirement within the Directive (from which the WTR 1998 is derived) required actual daily working time to be recorded, which suggested that the requirements set out in Regulation 9 of the WTR 1998 were not as high as the standard required by the European Directive which was being implemented by the WTR 1998.

The UK Government proposes therefore to expressly provide for a more relaxed requirement for record keeping in the UK, by expressly amending the WTR 1998 to make it clear that: (i) the records maintained by employers in respect of working time may be “created, maintained and kept in such manner and format as the employer reasonably thinks fit”, and (ii) an employer is not obligated to record each worker’s daily working hours to comply with the record keeping requirement.

2. Proposals for holiday pay and annual leave.

For those who regularly follow our blogs, it will be clear that there is a great deal of confusion and uncertainty about the way in which holiday pay and annual leave is calculated, particularly for those with irregular hours and part-year workers. Please see our blogs here and here.

The problems that were created for employers and employees alike in understanding and operating holiday entitlement is well set out in the Government’s Explanatory Memorandum (which can be accessed here), as follows:

“The Working Time (Coronavirus) (Amendment) Regulation 2020 (S.I. 2020/365) (“the Covid Regulations”) came into force in March 2020 as emergency temporary legislation to prevent workers losing annual leave entitlement if they were unable to take it due to the effects of the Covid-19 pandemic. The Covid Regulations amended the WTR to permit workers to carry over up to 4 weeks of annual leave into the following two leave years, if it was not reasonably practicable for a worker to take this leave in the year to which it related. The Covid Regulations were introduced in March 2020 as emergency temporary legislation to prevent workers from losing annual leave entitlement if they were unable to take it due to the effects of coronavirus. They amended the Working Time Regulations to allow workers to carry over the four weeks of regulation 13 leave into the following two leave years, if it was not reasonably practicable for a worker to take this leave in the year to which related.

The case of Harpur Trust v Brazel concerned calculating holiday entitlement and pay of a permanent part-year worker on a zero hours contract. The Supreme Court held that the correct interpretation of the WTR is that holiday entitlement for part-year workers should not be pro-rated so that it is proportionate to the hours they work. They are entitled to the full 5.6 weeks of statutory annual leave, calculated using the 52-week reference period. In summary, the effect of the judgment is that part-year workers are entitled to a larger annual leave entitlement than part-time workers who work the same number of hours across the year.

Under regulation 15A of the WTR, workers accrue their annual leave in the first year of their employment at the rate of one twelfth of their 5.6 weeks’ entitlement, on the first day of the month. This is straightforward for workers with fixed hours or working patterns as their annual leave is usually expressed in weeks or days. However, this is at odds with regulation 13(5) and 13A(5) which set out how to pro-rate holiday entitlement when a worker starts or leaves midway through a leave year.

Workers are entitled to 5.6 weeks of paid statutory annual leave. This is comprised of 4-weeks leave provided in regulation 13 (also known as EU-derived leave) and 1.6 weeks provided in regulation 13A (domestic) leave. Different rules govern these two separate pots of annual leave, due mostly to the abundance of retained EU case law. This case law provides that the regulation 13 leave should be paid at the worker’s “normal remuneration”, but it does not definitively define normal remuneration though it is generally understood to include certain types of bonuses and commission. In contrast, the 1.6 weeks of regulation 13A leave is only required to be paid at the worker’s “basic remuneration” and this is generally held not to include bonuses and commission. The 2023 Act removes EU interpretive effects, creating a risk that the case law defining what should be included in “normal remuneration” would fall away.

Rolled Up Holiday Pay (RHP) describes a practice in which a worker receives their holiday pay as an enhancement with every payslip rather than receiving it when they take annual leave. A 2006 judgment from the Court of Justice of European Union (CJEU) declared this practice to be unlawful, holding that payment needed to be made at the same time as leave was taken.”

It is in that context that the Regulations as currently drafted propose certain changes as follows:

• The repeal of the Covid Regulations with effect from 1 January 2024, meaning that workers will no longer be able to accrue carry-over leave (save where they have been on a statutory absence such as maternity leave or as a result of sickness absence have been unable to take holiday). However, the Regulations do provide for a back-stop date of 31 March 2024 in respect of any such leave that has been accrued prior to 1 January 2024.
• Contrary to what was decided in the Harpur Trust v Brazel case, it will in fact be possible for employers to calculate the amount of holiday someone with irregular hours or who is a part year worker (teachers for example) is entitled to on the basis of 12.07% of the hours they actually worked.
• A definition of “normal remuneration” for the purposes of calculating holiday pay is to be introduced. This definition includes commission payments, payments for professional or personal status relating to length of service, seniority, or professional qualifications, as well as other payments, such as overtime payments.
• Employers will be permitted to pay irregular hours workers and part year workers their holiday through “rolled up holiday pay” (RHP); employers are likely to do that when calculating holiday pay over a 52 week reference period is not practicable. If employers elect to base the holiday pay calculation on RHP, they would be required to pay the worker holiday pay at the rate of 12.07% of the workers total earnings over the relevant pay period and the RHP would have to be stated as a separate item on each payslip.

It should be noted that the Government have opted not to take forward certain proposals that were considered during the consultation process. More specifically, it has been decided that: (i) workers overall entitlement to leave will remain as it was (i.e. 5.6 weeks of leave), (ii) that entitlement will continue to be split into 4 weeks of annual leave at “normal remuneration” (see new definition as above), and 1.6 weeks of basic remuneration, and (iii) the wider provisions of the WTR 1998, such as the 48-hour working week, shall continue to operate in their current form.

3. TUPE 2006.

Part 4 of the Regulations concern amendments to the duty to inform and, if necessary, consult with employee representatives under TUPE 2006. The general position under TUPE 2006 is that the transferor and transferee must inform and, if necessary, consult with the affected employees’ representatives or, where no representatives are in place, arrange for their election. The exception to this rule is contained in regulation 13A TUPE 2006, which provides that where a business: (i) employs fewer than 10 employees, (ii) there are no appropriate representatives for those employees, and (iii) the employer has not invited the affected employees to elect any representatives, then the employer is able to discharge its duty by informing and, if necessary, consulting directly with the affected employees.

The Regulations propose to extend the circumstances in which an employer may inform and, if necessary, consult directly with affected employees (as opposed to elected employee representatives) to situations where one of the following conditions is satisfied: (i) the employer employs fewer than 50 employees (regardless of the size of the transfer), or (ii) there are fewer than 10 transferring employees (irrespective of the size of the employer). The intention, as stated in the Explanatory Memorandum, is for this measure to “make transfers easier and quicker for eligible businesses, introducing additional flexibility for more businesses while retaining important protections for employees”.

This proposed amendment shall apply to transfers taking place on or after 1 July 2024.

4. Ancillary Proposals

The Government has also committed to the restatement of certain pieces of retained EU law that would otherwise be revoked on 31 December 2023 under the 2023 Act. This is to ensure certainty and continuation in employment rights. In particular, the Regulations will ensure the restatement of the following three rights: (i) the right to carry over annual leave entitlement where a worker has been unable to take it due to maternity/family related leave or sick leave, (ii) the right to carry over holiday entitlement in circumstances where the employer has failed to inform the employee of their right to leave or enabled them to take it, and (iii) the pay rate for leave entitlement accrued as set out in regulation 13 of the WTR 1998.

Comment

We anticipate that the Regulations, despite remaining in draft form for now, will come as welcome news for most employers and will bring some clarity to some common issues arising for employers. A more streamlined process for the calculation of holiday pay for certain workers should be seen as good news for employers, as too will the proposal to extend the circumstances under TUPE 2006 in which businesses can inform and consult directly with their employees. If nothing else, the Government – perhaps ambitiously – anticipates that record-keeping reforms will result in an annual saving to business of £1.2bn a year, holiday pay reforms will produce an annual saving to business of £74.7m a year, and the amendments to TUPE 2006 will provide a “small admin saving” for businesses. Time will tell.

Should you have any queries in relation to the Regulations and their potential effect on your business and/or employment rights, or indeed any other employment law related query, please contact Linky Trott of this firm or any other member of the Edwin Coe Employment Team.

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