Holiday entitlement and pay reforms 2024: Significant changes but do they go far enough?

The seemingly innocuous concept of holiday pay has been a complex and thorny issue for workers and employers alike for a long time. Differences in leave and pay entitlements in respect of differing working hours, days and rates of pay have kept the courts and tribunals busy, each major case adding further layers of complexity that leave employers confused and frustrated.

Following recent cases in the Supreme Court and given that EU law no longer has supremacy over domestic legislation (as of 1 January 2024), the Government has taken the opportunity to try to simplify the UK’s domestic legislation relating to holiday entitlement. Has it done that? In the immortal words of Madonna’s iconic song relating to holiday, “it would be so nice!”.

This blog will briefly touch on the main problems addressed, key practical points to note, and areas of remaining uncertainty.

1. Recap on what statutory holiday entitlement is

The right to 4 weeks’ paid leave each holiday year (a maximum of 20 days for a full-time worker) was introduced by the Working Time Regulations 1998 (WTR) under Regulation 13 which implemented the EU Working Time Directive (WTD). Employment lawyers often refer to this, rather unimaginatively, as “Reg 13” leave.

The WTR was subsequently amended by the UK to add 1.6 weeks’ additional paid leave entitlement to take into account the 8 bank and public holidays in the UK. This resulted in the total statutory entitlement of 5.6 weeks leave (28 days for a Monday to Friday worker) which we have all become familiar with. This additional entitlement, which is not EU derived, is known as “Reg 13A” leave.

Problems have arisen over the years as a result of these different leave entitlements and how pay for that leave should be calculated resulting in different elements of variable pay applying to Reg 13 and Reg 13A leave.

2. How is holiday pay calculated?

You may be excused for thinking that holiday pay should be paid at an equivalent rate to a worker’s basic salary, but this is not always the case.

Domestic case law has, for some time now, required employers to calculate workers’ holiday pay by reference to their “normal remuneration”. There is no certain definition of ‘normal remuneration’, but case law suggests it can include commission, bonus, overtime, payments for professional or personal status and other ‘add on’ payments.

What are the changes?

The Government’s amendments to the WTR, introduced from 1 January 2024, now specifically provide that in calculating holiday pay, employers must include:

• payments, including commission payments, which are intrinsically linked to the performance of tasks which a 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; and
• other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

Key points to note:

• For workers with regular working hours (i.e. their core working hours do not vary), holiday pay based on “normal remuneration” will only apply to the EU derived Reg 13 leave. Holiday pay for Reg 13A leave may be paid at basic rate of pay.

• In practice, paying workers different rates for the two different types of leave may be more of an administrative burden for employers to implement and many may take an approach of paying all leave at the enhanced rate by reference to “normal remuneration”.

• Employers wishing to pay different holiday rates for different periods of leave should explain this clearly and consistently to the worker, for example in the worker’s contract or staff handbook, stipulating that annual leave is taken in a particular order (i.e. the first 4 weeks of annual leave would be the Reg 13 leave) and how it will be calculated.

• For workers with irregular working hours and part-year workers (for example, someone who works for part of the year under a permanent or continuous contract, like many teachers), where an employer chooses to use the rolled-up holiday pay method (see below) the requirement to calculate holiday pay by reference to “normal remuneration” applies to both the Reg 13 and Reg 13A leave. This means that 5.6 weeks in total is payable at a rate equivalent to a worker’s “normal remuneration”.

• If employers provide any additional holiday leave entitlement in excess of the 5.6 weeks’ Reg13 and 13A, leave then employers should consider the rate of pay applicable to such additional contractual leave and explain this clearly and consistently to the worker.

3. Rolled-up holiday is back – for some workers at least

In many industries, particularly those involving casual workers, gig-economy workers and those engaging and supplying temporary agency workers, employers have often taken the position that a worker’s entitlement to annual leave was already accounted for by including in their basic rate of pay any annual leave which is accrued, thus “rolling up” holiday pay into basic pay.

Rolled-up holiday pay has typically been calculated at a rate of 12.07% on top of a worker’s hourly wage on the basis that 5.6 is 12.07% of 46.4 (where 5.6 is the number of weeks’ annual leave entitlement and 52 – 5.6 = 46.4 which is the number of working weeks in the year).

This practice was heavily challenged in our domestic courts and ultimately deemed unlawful in 2006 on the basis that paying for holiday in this way defeated the health and safety objective of the WTD by deterring workers from actually taking time off. This made the management of a casual workers’ holiday entitlement particularly complicated for employers where hours worked and rates of pay can be variable.

What are the changes?

The Government’s amendments to the WTR, introduced for leave years beginning on or after 1 April 2024, provide that workers with irregular hours and part-year workers will no longer fall within the scope of Reg 13 and Reg 13A.

Employers will need to apply new Regs 15B to 15F and Reg 16A which broadly set out that, for these workers, holiday entitlement will accrue at the rate of 12.07% of the hours worked in the previous pay period (being the frequency that the worker is paid; weekly, monthly etc).

Employers may now elect to implement a lawful rolled-up holiday pay scheme for leave years commencing on or after 1 April 2024 so long as employers use an uplift of 12.07% against a worker’s normal rate of pay in the previous pay period in respect of their 5.6 weeks’ statutory holiday entitlement, rather than calculating and paying for holiday when it is taken.

Key points to note:

• What about agency workers? Rolled-up holiday pay may only be applied in respect of agency workers if they are an irregular hours worker or part-year worker. Whether they will remain in the scope of Reg 13 and 13A will depend upon the nature of their contract and hours. If, under the terms of their contract, the hours they will work in each pay period in that year is wholly or mostly variable or there will be periods in the year of at least a week where they are not required to work, the rolled-up holiday pay may be applied to them.

• As set out above, all rolled-up holiday pay must be paid at “normal remuneration” and the portion attributable to holiday pay must be itemised separately on the payslip to avoid confusion. The holiday pay should be paid at the same time as the worker is paid for the work done in each pay period.

• There are separate rules for calculating rolled-up holiday pay if the worker is on sick leave or family leave where a 52 week pay period should be used.

• It is not mandatory to pay workers using the rolled-up pay method. Employers may use the existing 52-week reference period method to look back at a worker’s previous 52 paid weeks to calculate what that worker should be paid for a week’s leave and pay at the time that the leave is taken.

• If employers intend to start using rolled-up holiday pay, they should check their workers’ contract in case this amounts to a variation of contract.

• If using the rolled-up holiday pay method, workers must still be allowed to take their holiday, but will not be paid at the time they take it.

• New accrual rules will apply for holiday years commencing on or after 1 April 2024 for part-year and irregular hours workers who are paid rolled-up holiday pay. These workers will accrue annual leave entitlement at a rate of 12.07% of the number of hours that they have worked during that pay period. The new accrue-as-you-go approach means that these workers will build up holiday entitlement as they work, rather than getting a whole year’s holiday entitlement up front at the beginning of the year. Their entitlement will stay in proportion to hours worked.

• Since these new rules only apply to leave years starting on or after 1 April 2024, for employers that run their leave years from 1 January to 31 December, the rules will, in practice, not actually take effect until 1 January 2025, being the start of the first holiday year after 1 April 2024.

4. Carry-over rules

Both EU and domestic case law has developed over the years to allow carry-over of holiday entitlement in certain circumstances. The intention is to preserve these principles.

What are the changes?

The Government’s amendments to the WTR, introduced on 1 January 2024, include new provisions which enshrine the case law that has developed, specifically allowing holiday to be carried over where holiday has not been able to be taken, in the following situations:

• sick leave;
• where the employer has either failed to give the worker a reasonable opportunity to take the holiday or failed to encourage them to do so or failed to tell them that if not taken, holiday will be lost;
• due to statutory maternity or other statutory family leave; and
• where an employer has failed to correctly recognise a worker’s right to annual leave, for example by miscategorising them as self-employed.

Key points to note:

• Removal of Covid-19 carry-over rules – During the Covid-19 pandemic, the Government introduced emergency regulations relaxing the restriction on carrying over annual leave, to allow businesses the flexibility to manage their workforce, while also protecting workers’ rights to paid leave. This allowed for holiday to be carried over from one holiday year to the next where in any leave year it was not reasonably practicable for a worker to take some or all of the leave to which the worker was entitled under this regulation as a result of the effects of coronavirus (including on the worker, the employer or the wider economy or society). This temporary relaxation of the normal carry-over rules has now been repealed (as of 1 January 2024) and workers will have until 31 March 2024 to use up any accrued holiday carried over under those rules.

5. Do the Government’s changes go far enough?

Although the changes are certainly welcomed and will, in many cases, simplify calculations for employers, there remain areas of uncertainty which have not been addressed by this codification of the law, for example:

• there is still some uncertainty around which elements of variable pay should be included in “normal remuneration” for Reg 13 leave and there remains scope for legal argument;
• as set out above, the Government has chosen not to combine Reg 13 and Reg 13A leave, choosing to keep them as separate entitlements to which differing pay and carry-over entitlements apply. There is further uncertainty following the Supreme Court’s decision in Chief Constable of Northern Ireland v Agnew where the court did not treat the entitlement as two different types of leave but rather as one composite entitlement regardless of whether it was EU-derived or not; and
• in relation to the new accrual system for irregular hours workers and part-year workers it is unclear how these workers are supposed to book and take time off; by the very nature of this type of working pattern workers are supposed to have the freedom to work as much or as little as they want at times of their choosing. The Government’s changes provide for a clear method of calculating the number of hours of holiday entitlement accrued, but there is no guidance on how that translates into taking the requisite amount of time off.

6. What should employers do?

The following steps should be undertaken by all employers:

• review the makeup of your workforce so that you have a clear understanding of the types of workers you employ (for instance, full-time, irregular hours, part-year);
• review your holiday leave and pay arrangements and ensure they comply with the changes introduced on 1 January 2024 and those changes coming in for holiday years from 1 April 2024;
• create a diary reminder of when these changes will come into effect and make sure to work towards making any changes necessary in good time;
• if you are unsure as to whether you need to implement changes or how you should go about making such changes and bringing them into effect, seek advice;
• check that the systems you are using allow you to retain adequate records of pay arrangements for compliance purposes;
• make sure that employees are reminded to take their holiday entitlement on a regular basis and are given reasonable opportunity to do so.

We have considerable experience in acting in respect of holiday pay claims in the employment tribunals, the Employment Appeal Tribunal, the Court of Appeal and the European Court of Justice, including in the landmark case King v The Sash Window Workshop [C-214/16] where the European Court held that there was no limit to the period of carry-over of Reg 13 leave, where a worker had been denied paid leave (in that case due to misclassification of the worker as being self-employed).

Should you have any queries in relation to the changes and their potential effect on your business and/or employment rights, or indeed any other employment law related query, please contact Linky Trott, Elliot Francis, Clare Gilroy-Scott or any other member of our Employment Team.

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