Due to popular demand – rolled up holiday pay is back (for some)!

On 8 November 2023, the Government announced proposed changes to how holiday pay is calculated for casual, irregular and part-year workers, such as term time workers. 

It is proposed that from 1 January 2024, employers will be allowed to use the accrual method of 12.07% of hours worked to calculate holiday pay.  But only for those workers that work irregular hours and part-year workers. This ‘rolled-up’ holiday pay, enables workers to receive an additional amount or enhancement to their regular pay instead of being paid when they take annual leave.

Under the proposals, the ability to pay rolled-up holiday will apply to large portions of some workforces. In the draft regulations:

• Irregular hours workers will mean workers who have wholly or mostly variable paid hours in each pay period.
• Part-year workers will mean workers who are contracted to work only part of a year and who are not required to work or be paid for at least a week of each year.

Rolled-up holiday was widely used in the past – both for casual and part year workers. However, it has been technically unlawful since 2006 and was determined to result in substantially incorrect holiday pay for part-year workers in the decision of the Supreme Court in the case of Harpur Trust v Brazel (because the legislation does not allow for holiday entitlement to be reduced to reflect the fact a worker only works for part of the year).  The overwhelming feedback in the Government's consultation was that trying to calculate holiday pay over a 52-week period was too much of an administrative burden for employers, especially in sectors where a high percentage of staff were engaged on casual contracts. 

Those not contracted to work irregular hours or for part of the year will continue to accrue annual leave in their first year of employment as they do now by receiving 1/12th of the statutory entitlement on the first day of each month and to pro-rate it thereafter.

We need to await progress of the draft regulations for clarity on the exact dates and rules which will apply. For now, it is worth considering what your contracts say about holiday pay for your irregular and part-year workers to determine whether you already have scope to change the method holiday pay or whether you would need to consult with employees about a change to their contract to be able to move to rolled-up holiday once it is introduced.

The Government has also confirmed that it intends to amend the Working Time Regulations so that:

• Workers are entitled to carry-over annual leave when they are unable to take their leave due to being on maternity/family-related leave or sick leave, have been prevented from taking paid holiday or been wrongly classified as self-employed i.e. to keep the effect of European decisions which would otherwise be revoked by the Retained EU (Revocation and Reform) Act 2023.
• Normal pay is defined in the legislation so that there is legislative clarity about what payments employer is required to factor into holiday pay calculations. The legislation will clarify that this will include all payments which are intrinsically linked to the performance of tasks a worker is contracted to carry out such as commission payments, payments for personal or professional status relating to length of service,  seniority or qualification and overtime payments (where regularly paid in the 52 weeks preceding the calculation).  Again this would not change the current position but instead is designed to keep the effect of European decisions on what payment should be included in holiday pay calculations which would otherwise be revoked by the Retained EU (Revocation and Reform) Act 2023.It introduces a method of accrual of annual leave for irregular hours and part-year workers when they have had other periods of maternity/ family related leave or sick leave.

The Government had originally also consulted about combining pots of leave entitlement so that the 4 weeks "Euro-leave" (derived from European law) and the 1.6 weeks "UK Leave" (additional holiday entitlement legislated for in the UK of its own volition) could be combined as one leave entitlement of 5.6 weeks. The law currently means that employers are obliged to pay "normal pay" (i.e. factoring in much more than just basic pay) for the 4 weeks of Euro Leave and basic pay only to many employees in respect of the 1.6 weeks of UK Leave. Following the consultation, the Government has decided not to introduce this single annual leave entitlement indicating that responses to the consultation suggested it would only be beneficial is there was a single rate of holiday pay. This means that workers will continue to be technically entitled to the two different (existing) rates of holiday pay; 4 weeks at their normal rate of pay and 1.6 weeks at their basic rate of pay.  Some employers already calculate all holiday entitlement based on normal pay for administrative ease – but there is not requirement to and opting to pay basic pay only for 1.6 weeks of leave entitlement could save some employers significant money. The Government has indicated that this is an area that may be looked at for future reform (and it may be that it was felt too unfriendly to business to introduce this change at the current time).

Away from holiday, the Government is proposing to:

• Make amendments to clarify the requirement to keep records in respect of working time; and
• Reform TUPE consultation requirements so that employees can be directly consulted (without a need to elect reps) where a transfer relates to a small business of fewer than 50 employees or the transfer itself involves fewer than 10 employees.

Rolled up holiday pay will be a welcome change for employers.  If you have any further queries in this area, please do make contact with a member of our team.