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How is holiday pay changing?

The way holiday pay is calculated changed in England, Wales and Scotland on 1st January 2024 under the draft Employment Rights (Amendment Revocation and Transitional Provision) Regulations 2023 (the Regulations).  So, what is changing?

Unlawful deductions from wages claims

Workers will continue to receive four weeks of holiday at 'normal' pay (referred to as Annual Leave) and 1.6 weeks of holiday that can be paid at basic pay (referred to as Additional Leave).

The Regulations define payments for Annual Leave as including: 

  1. Payments, including commission payments, which are intrinsically linked to the performance of tasks a worker is contractually obliged to carry out.

  2. Payments for professional or personal status relating to length of service, seniority or professional qualifications.

  3. Payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation. 

However, the Regulations do not define whether non-contractual commission or discretionary bonuses should be included, nor the meaning of 'regularly' concerning overtime payments. 

Irregular hours and part-year workers

  1. Irregular hours workers are defined as those whose number of paid hours worked in each pay period during their contract term in that holiday year are wholly or mostly variable.  This captures most zero-hours workers and some agency workers. 

  2. Part-year workers are defined as those only required to work part of the year under the terms of their contract, with periods within that year (during the contract term) of at least a week where they are not required to work and are not paid. This captures seasonal workers and some term-time-only workers.

  3. A new accrual method calculates holiday entitlement at 12.07% of hours worked in a pay period in the first year of employment and beyond, accrued at the end of each pay period and subject to a total cap of 28 days of holiday each year. 

  4. A new method for calculating holiday accrued during sickness or family-related absence requires entitlement to be 12.07% of the average weekly working hours in the 52-week period before the absence.

Holiday carryover

The Regulations confirm when holiday can be carried over, subject to the time limits below.  

  1. Up to four weeks of Annual Leave can be carried forward where an employer fails to recognise or pay Annual Leave, such as where workers are misclassified, not encouraged or allowed to take Annual Leave or not warned about needing to 'use it or lose it'. The right to carryover lasts until the end of the first full year in which the employer is no longer at fault.

  2. Up to 5.6 weeks (Annual Leave and Additional Leave) not taken owing to family-related absence can be carried forward until the end of the next holiday year.

  3. Up to four weeks' Annual Leave not taken owing to sickness absence can be carried forward but must be used within 18 months of the end of the holiday year in which it accrued.

  4. From 1st January 2024, workers will no longer be able to carry forward any Annual Leave for Covid-19, although Covid-19 holiday accrued before 1st January 2024 can be taken on or before 31st March 2024. 

Irregular hours and part-year workers will be able to carry over all the leave they are prevented from taking when the employer does not recognise the leave or sickness, not just the four weeks' Annual Leave. 

Rolled-up holiday pay

Employers can pay ‘rolled up holiday pay’ (paying holiday pay simultaneously with basic pay) to irregular hours and part-year workers.  This is calculated using 12.07% of all pay for work done in a pay period and is paid at the same time as the worker is paid for the work done.  It is itemised separately on the worker’s payslip.  Moving to rolled-up holiday pay will likely require changes in workers’ contract terms.  Employers must also ensure workers still take at least 5.6 weeks off work.

Whilst the Regulations are welcome and provide some clarity, calculating holiday pay remains complicated.  We suggest you take these steps to assess the impact on your business.

Check

Check your holiday year – when does this run?  The changes for irregular hours and part-year workers will apply to holiday years beginning on or after 1st April 2024, meaning they will take effect at different times for different employers.  For example, they will be effective from 1st January 2025 for employers who base their holiday year on the calendar year.

Analyse

Analyse your irregular hours and part-year workers.  Who will be caught by the new definition of irregular hours or part-year workers?  If you want to pay rolled-up holiday pay for these workers, their contracts must be changed.  Also, the method of accruing holiday in hours at the end of each pay period for these workers means that you will have to decide how to handle requests to take more holiday than has been accrued at any given point in the year.

Review

Review your contracts, policies and procedures.  Do they need amending to comply with the new rules?  Are you capturing overtime, commission and allowance payments in at least four weeks of holiday pay?  To head off carryover requests, ensure that you remind workers to use their holiday entitlement and give them enough opportunity to take it.

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