For more than a decade, holiday accrual and pay has been a vexed issue for employers. A string of European Court of Justice and UK cases have complicated the picture surrounding how holiday pay should be calculated, how holiday accrues for workers with atypical working patterns, and what records of working time employers are required to maintain. Following Brexit and the Retained EU Law Act, the Government indicated that it would introduce new regulations concerning holiday pay, reforming some key areas (such as accrual for atypical workers and rolled up holiday pay).
We now have the new regulations, which are due to come into force in January 2024, although some aspects will apply to holiday years starting on or after 1 April 2024. Employers will need quickly to become familiar with the regulations and take decisions about how to implement the new requirements. This is likely to require liaising with payroll providers and reviewing current practices for recording hours worked, so employers will need to address this without delay.
So, are the snappily-named Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 an early Christmas present, or a lump of coal in employers' stockings? We'll take a look at the key points employers will need to grapple with.
Action point 1: Calculating holiday pay for “EU leave” (i.e. the 4 weeks of annual leave required by EU law, AKA “Regulation 13 leave”)
The new regulations set out what needs to be included when calculating a “week's pay” for holiday pay purposes. This only applies to the 4 weeks' leave which was required under EU law, not the additional 1.6 weeks' granted under UK law (or any additional contractual entitlement). Pay for this holiday must now include:
- payments which are intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out (such as commission payments);
- payments for professional or personal status relating to length of service, seniority or professional qualifications (for example, any “acting up” allowances); and
- payments which have been regularly paid to a worker in the 52 weeks preceding the calculation date (for example, overtime payments).
Although this reflects established caselaw, our experience is that not all employers consistently apply these principles to holiday pay, and there is still some scope for argument about how, for example, annual bonuses should be treated. Employers will need to review their current practices and contracts, and assess whether they need to change their calculation practices.
Action point 2: Irregular hours and part-year workers
The regulations create a new definition of these workers, which is intended to capture:
- workers whose hours vary from one pay period to another; and
- workers who work only part of the year (i.e. have at least one week during which they are not required to work and for which they are not paid).
For holiday years starting from 1 April 2024, holiday for these workers will accrue (in broad terms) proportionately to the hours they work (reversing the effect of the Supreme Court decision in Harpur v Brazel). The new regulations also expressly permit rolled-up holiday pay for these workers as an alternative (i.e. it is permissible to pay an extra sum equivalent to their holiday pay entitlement for each month, rather than them taking and being paid for specific days of annual leave). Again, this applies to holiday years starting on or after 1 April 2024.
There are subtleties and ambiguities in the definitions of “irregular hours” and “part year” worker; employers will need to consider the definitions carefully to ascertain which of their staff are within scope, and decide whether to opt for rolled-up holiday pay for these workers.
Action point 3: Carryover of holiday
The regulations stipulate that up to 5.6 weeks from each holiday year can be carried over to the next holiday year where the worker has been unable to take their holiday due to taking statutory leave (maternity leave, paternity leave, adoption leave, etc.).
Further, in line with EU caselaw, the 4 weeks of EU leave can be carried over where:
- the worker has been unable to take holiday due to taking sick leave (in which case the carried over leave must be taken within 18 months of the leave year to which it relates); or
- in any leave year, the employer does not:
- recognise a worker's right to leave or does not pay them for leave taken;
- give the worker a reasonable opportunity or encourage them to take leave;
- inform the worker that leave not taken by the end of the leave year will be lost.
However, for part-year or irregular workers, these carryover rules apply equally to their full entitlement (whether “EU” or “UK” leave).
Employers will need to take active steps to encourage workers to take their full entitlement and inform workers that holiday will be lost if they do not take it in the relevant holiday year - a statement in an employment contract is unlikely to be sufficient. Employers will need to review their systems and determine how best to ensure that staff are given sufficient encouragement and warning. This may pose particular challenges for employers with unlimited holiday policies, increasingly popular in the tech sector and US-owned businesses.
Action point 4: Recordkeeping
The new regulations slightly relax the record-keeping requirements under the Working Time Regulations and ECJ caselaw. However, employers with irregular and part-year workers will need to ensure that their records of hours worked are sufficiently detailed for accurate calculation of holiday entitlement for these workers.
Although employers will welcome some aspects of the regulations, there will be a lot for HR teams to get to grips with and considerable scope for disputes and litigation. Unfortunately, there will be little opportunity for getting away from it all in 2024.
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