New statutory holiday pay rules – what employers need to know14/12/23
The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (the Regulations) come into force on 1 January 2024 and will amend the statutory holiday pay rules in the Working Time Regulations 1998 (the WTR).
The Regulations aim to maintain the rights to ‘normal’ pay during holiday and carry-over of unused leave (established by EU and domestic case law that would otherwise be lost on 31 December 2023 following Brexit) and also introduce new rules for part-year and irregular hours workers.
In this insight, we summarise the impact of the Regulations and what this means for employers and their workers.
New class of worker – with their own holiday pay rules
In response to the perceived unfairness created by the 2022 Harpur decision (see our insight for further details here), the Regulations set out a new system of holiday accrual for part-year (i.e. term-time only) and irregular hours workers (which will include bank workers, for example).
The Regulations define these terms as follows:
- “A worker is an irregular hours worker, in relation to a leave year, if the number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable”.
- “A worker is a part-year worker, in relation to a leave year, if, under the terms of their contract, they are required to work only part of that year and there are periods within that year (during the term of the contract) of at least a week which they are not required to work and for which they are not paid.”
With effect from the start of a new leave year starting on or after 1 April 2024, their WTR holiday entitlement will accrue (in hours not weeks) at the rate of 12.07% of the actual hours worked in each pay period, up to a maximum of 5.6 weeks a year.
Employers will be able to choose to either:
- Pay holiday pay when holiday is taken. This is to be calculated at the rate of a week's pay for each week's holiday. A week's pay will be calculated as an average amount of weekly pay in the 52 weeks preceding the calculation date. This should, in effect, produce an hourly rate of holiday pay that reflects the average hourly rate of pay over the last year.
- Pay rolled-up holiday pay. This is paid as an uplift of 12.07% to the worker's pay for work done in each pay period. This is a simpler calculation than if holiday pay were being paid at the time holiday is taken. Workers must be allowed to take their holiday, but will not be paid at the time they take it.
These workers will also now accrue holiday during periods of sick leave or statutory leave (such as maternity leave), using an average over a 52-week reference period to calculate the amount of holiday accrued.
From 1 January 2024, the WTR will include the three carry-over rights that had been established by EU and UK case law:
- Where the worker is unable to take some or all of their holiday as a result of a period of statutory leave (e.g. family-related leave), they are entitled to carry-over that untaken holiday into the following leave year.
- Where the worker is unable to take some or all of their holiday as a result of a period of sickness, they are entitled to carry-over that untaken holiday into the following leave year, provided it is taken within 18 months of the end of the leave year to which it relates.
- The worker is entitled to carry-over some or all of their holiday, where in any leave year, the employer fails to:
- recognise a worker's right to annual leave or paid annual leave; or
- give the worker a reasonable opportunity to take leave or encourage them to do so; or
- inform the worker that leave not taken by the end of the leave year will be lost.
In such cases, the right to take the carried-over leave will last until the end of the first full leave year in which there is no such failure by the employer.
These carry-over rights apply to all of the 5.6 weeks of statutory holiday entitlement with one exception – the sickness carry-over rules only apply to the four weeks of ordinary Working Time Directive statutory leave for regular hours workers (the 1.6 weeks of additional domestic UK leave being excluded).
Irregular hours workers only - the worker and employer may agree in a "relevant agreement" to carry over "part" of the worker's accrued holiday to the next leave year.
The temporary carry-over rules introduced during the COVID-19 pandemic are no more and any accrued carry-over leave must be used by 31 March 2024 or lost.
What must be included in a week's holiday pay
The Regulations stipulate that a week's pay for holiday will include:
- “Payments, including commission payments, intrinsically linked to the performance of tasks which a worker is obliged under their contract to carry out.”
- “Payments for professional or personal status relating to length of service, seniority or professional qualifications.”
- “Other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.”
This amended WTR definition follows the vast amount of EU and UK case law on what should be included in "normal remuneration" for the purposes of Working Time Directive holiday pay (four weeks). However, although it will apply to all of the holiday entitlement (5.6 weeks) for part-year and irregular hours workers, it will be limited to the four weeks of ordinary Working Time Directive statutory leave for regular hours workers (the 1.6 weeks of additional domestic UK leave are excluded).
Practical implications and next steps
The new rules for part-year and irregular hours workers are welcome. Applying a leave system measured in weeks to a workforce whose working time is measured in hours has always caused issues. The new rules are easy to understand and administer and reflect the practical solutions that many employers have had in place for many years.
Arguably, little has changed for regular hours workers as the Regulations simply add the principles established by many years of case law to the WTR. However, it remains to be seen how successfully that has been done. There are many questions about the interpretation of the new rules that will not be resolved unless and until they are considered by the tribunals and appellate courts.
We recommend that employers review their existing practices, policies and contracts of employment to ensure they are compliant with the amended WTR.
How Capsticks can help
Our employment team has significant experience of supporting employers on working time issues (by drafting policies, contracts and delivering training to employees at all levels) and also to deal with any complaints that may arise (by conducting investigations, supporting decision makers and HR, and defending any employment tribunal claims).
If you would like to access advice, training or further guidance on working time issues (either generally or in relation to the new rules or a specific case), please contact Nicola Green, Chloe Edwards or Sean Hick.