The most significant changes have been made to holiday pay rules for some time as the UK seeks to enshrine in UK law many of the principles introduced by the EU.
The headline changes which will take effect for holiday years commencing from 1 April 2024 onwards include:
• re-introducing rolled-up holiday pay for irregular hours and part-year workers using the 12.07% of hours worked calculation method;
• changes to the definition of a week’s pay for holiday pay calculations;
• changes to carry over of holiday rules.
Rolled-up holiday pay is to be allowed – for some….
• The term “rolled-up” holiday pay refers to the practice of paying an employee’s holiday pay at the same time as basic pay (i.e. “rolling” the two payments together).
• The new laws allow rolled-up holiday pay for holiday years from 1 April 2024, (up to a maximum of 28 days per year) as long as:
– the worker counts as an irregular hours or part-year worker;
– holiday pay is calculated at 12.07% of all pay for work done;
– the extra 12.07% is paid at the same time as pay for the work done;
– the holiday pay is itemised separately on the payslip.
There are some special rules for calculating rolled-up holiday pay if the worker is on sick leave or family leave – namely, where an individual has periods of absence through the year (for example on maternity or sick leave) and therefore the 12.07% method is not workable, their holiday accrual will instead need to be calculated over a 52 week reference period.
This approach will not be mandatory, but if you are an employer struggling with how to calculate holiday entitlement and pay for workers whose hours are irregular or occasional, then this could be a welcome development. Many such workers are not obliged to work any particular days, making it tricky to earmark any day as a holiday and make the correct payment.
NOTE:
• The new system means that you can manage holidays by simply paying an extra 12.07% pay supplement.
• When the worker actually takes holiday, they do not get paid extra holiday pay because they have already had it rolled up in their pay.
Potential pitfalls
There are a few potential drawbacks with rolled-up holiday pay:
• Rolled-up holiday pay is only available for people working on a part-year or irregular hours basis. So, if you do choose to offer rolled-up holiday pay, you must ensure that the worker is eligible first.
• The rolled-up holiday pay option doesn’t allow scope for distinguishing between different types of leave and paying them at different rates. The supplement must be paid on all earnings. There may be some situations in which that could make holiday more expensive.
• A word of caution about working time. Rolled up holiday pay doesn’t mean that workers can start working 52 weeks of the year, without taking any holidays. The onus is still on you to make sure they have at least 5.6 weeks off. The difference is just that, when they do take that time off, it would be unpaid as holiday pay has been accounted for in the rolled up holiday pay supplement.
Changes to the definition of a week’s pay for holiday pay
The other area of contention for holiday pay for some time has been whether holiday pay should include regular overtime, commission, bonuses, call out payments or just basic pay.
EU law concluded that holiday pay should not be calculated on basic pay only. Instead it should be calculated on the normal pay that the employee actually received. Therefore, the new rules aim to restate and codify these principles.
Please NOTE: Technically, employees in the UK have two separate holiday entitlements – four weeks’ leave based on EU law and an extra 1.6 weeks based on UK law, In practice employers view their employees as simply having 5.6 weeks of holiday each year but the distinction is important to note when viewing the new regulations.
Under the new rules, there will be two calculation methods although employers can adopt the more generous method for both types of leave:
• Holiday pay for the first 4 weeks of statutory holiday pay (and all holiday pay paid to irregular hours and part-year workers) must be calculated based on new “normal remuneration” provisions. which should include:
– Payments including commission payments which are intrinsically linked to the performance of tasks which the worker is obliged to carry out under their contract;
– Payments for professional or personal status relating to length of service, seniority or professional qualifications;
– Payments such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.
• The remaining 1.6 weeks statutory holiday can be paid at ‘basic’ pay level.
The reality is that employers will likely adopt the same policy for all holiday pay – but that same policy must be the more generous of the two.
Changes to the right to carry over holiday from one year to the next
The rights in relation to carry over of leave from one year to the next have also been codified in UK law.
• Where an employee is unable to take holiday due to family leave or sickness absence : they can carry over their holiday entitlement for a maximum period of 18 months after the holiday year in which it was accrued.
• Where an employee has not been able to take paid holiday in the correct holiday year because:
– their worker status has been denied by the employer (i.e. the employer has incorrectly classed them as self-employed); or
– their employer has failed to give them reasonable opportunity to take leave or encourage them to do so; or
– their employer has failed to tell the worker that if they don’t take the leave it will be lost;
they will be entitled to carry over 4 weeks’ holiday per year and every year unless and until the employer corrects the failing.
In practice this means it is more important than ever that employers must:
• ensure that they accurately assess the status of all individuals working for the company;
• ensure that they have systems and documents in place communicating the right to take holiday, encouraging employees to access the same throughout the year and explaining that holiday will be lost if not taken.
What should employers do now:
Employers should start reviewing their current approach to holidays against this new system:
• If you have populations of workers who are paid overtime, commission, or allowances etc then double check that this is being factored into their holiday pay correctly.
• If you want to pay holiday at different rates then you’ll need a system for identifying which type of holidays are which and setting out clearly, in a policy, that holidays are used up in a particular order.
• If you have workers who count as irregular hours or part-year workers, then review your approach against the new accrue-as-go system.
• Remind workers to use up their holiday entitlement and give them sufficient opportunity to do so.
• Update contracts and policies as necessary.
For advice and assistance please email nicola.goodridge@goodhr.co.uk or call +44 (0)7917878384
