New holiday rules guidance updated by the government

Recently, the UK government introduced significant updates to the holiday pay regulations.

These changes, affecting workers across England, Wales, and Scotland, aim to refine the calculation and distribution of holiday pay, particularly for irregular and part-year workers.

In April 2024, the government amended this guidance, in part due to confusion about the original drafting.

In our article we:

• Digest the recent guidance amendments
• Re-cap the changes that the government introduced from 1 January 2024

What updates has the government made to the guidance on the new holiday rules?

The government published guidance to try and help employers understand the changes.

In April 2024, the government amended this guidance, in part due to confusion about the original drafting.

The key change made to this guidance is to:

• Add wording to the section covering the part-year worker definition, so that this now reads:

"The regulations require that there must be a period of at least one week ‘for which they are not paid’ which means that it would still be possible for a worker to be paid ‘during’ that period so long as there is no expectation of them working in that period and nor are they receiving payment ‘for’ that period."

• Remove a previous example which suggested that Ian, who was paid an annualised (flat) salary over 12 months but has periods of time that last more than one week where he is not working, did not qualify as a part-year worker because there are no weeks where he does not work and does not receive pay.

This suggests that the government accepts that, given the statutory definition of a part-year worker (a worker who, under the terms of their contract, 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), workers who are paid "during" non-working weeks (as an administrative convenience for many annualised pay workers) but not "for" non-working weeks can still qualify as a part-year worker.

We consider this updated guidance to reflect the actual wording of the regulations in this regard.

The updated guidance also:

• Recommends that, when running the calculation for accrued holiday for irregular and part-year workers who are on sick or statutory family leave, an employer should work out the average number of hours per week (under step 1 of the method set out) by dividing the total number of hours worked in the 52 week period by 46.4 weeks (i.e. a year less the time spent on annual leave) rather than by 52 weeks. Whilst this arguably produces a more rational result as to an actual average or hours worked per week, it is directly at odds with the wording in the regulations.

• Makes it clear that whether or not bonuses should be factored into normal holiday pay calculations (in the same way as commission or regular overtime) "depends on the nature of the bonus". This unfortunately fails to remedy any uncertainty on bonuses, which is a missed opportunity and leaves employers grappling with this issue.

We have tried to bring you the latest news on holiday pay as concisely as possible here, but we appreciate that this is a challenging area and we can guide you through your own processes and provide advice on how best to apply the changes to your business.

A recap on the changes that the government introduced from 1 January 2024

The government announced and then introduced changes to holiday pay (affecting England, Wales and Scotland) very quickly in recent months.

In summary, these reforms (by way of regulations which amend the Working Time Regulations 1998) mean that:

For holiday years starting on or after 1 April 2024, irregular and part-year workers accrue annual leave on the last day of each pay period

For holidays years starting on or after 1 April 2024, irregular and part-year workers accrue annual leave on the last day of each pay period at a rate of 12.07% of the hours they have worked (up to a maximum of 28 days per year) as per new regulation 15B of the Working Time Regulations 1998.

Irregular-hours worker means a worker for whom, in relation to a leave year, 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.

Part-year worker means a worker for whom, in relation for whom, in relation to a leave year, under the terms of their contract is required to work only part of that year and there are periods within that year (during the term of the contract) or at least a week which they are not required to work and for which they are not paid. This includes part-year workers who may have fixed hours.

The Regulations set out special rules (effectively an averaging approach) as to how holiday will accrue during sick leave and statutory family leave such as maternity.

You need to have considered, planned and communicated any changes (including whether you will need to amend contracts) before this will affect your irregular or part-year workers. This will be dictated by your holiday year (unless you plan to change the holiday year specifically to change practise more quickly).

For holiday years starting on or after 1 April 2024, you can choose how you pay irregular or part-year workers holiday pay

For holiday years starting on or after 1 April 2024, you can choose how you wish to pay your irregular or part-year workers holiday pay. You can either:

1. Pay rolled up holiday pay under new regulation 16A of the Working Time Regulations 1998 – as an uplift of 12.07% to the worker's pay for a pay period (albeit you should still make sure they take holiday in practice).
2. Pay holiday when holiday is taken by the worker, where a week's holiday is the average number of hours worked in each week over the previous 52 weeks, and where the week's pay will be the average weekly pay over the prior 52 weeks.

You need to have considered, planned and communicated any changes (including whether you will need to amend contracts) before this will affect your irregular or part-year workers. This will be dictated by your holiday year (unless you plan to change the holiday year specifically to change practise more quickly).

From 1 January 2024, holiday pay must factor in overtime and commission

From 1 January 2024, holiday pay must factor in overtime and commission in accordance with the amended regulation 16 of the Working Time Regulations 1998.

This 'change' was effectively seeking to codify in statute the long and established case law (some of which was European) around what should be included in holiday pay under the Working Time Directive, so does not really change the law as such.

Workers who do not have entitlements under regulation 15B as an irregular or part-year worker have two separate holiday entitlements:

• Four weeks’ "Euro" leave based on EU law; and
• An extra 1.6 weeks’ "UK" leave based purely on UK law.

Prior to the reforms, under established case law (much of which was derived from Europe), the four weeks’ "Euro" leave have been required for some time to be paid at ‘normal’ pay, which means including regular overtime and commission in the calculation. But the additional 1.6 weeks’ "UK" leave could be paid at basic pay only – although in practice many employers have simply altered holiday pay calculation to include regular overtime and commission in the holiday calculation for both "Euro" leave and "UK" leave (if you have not and want to pay the leave differently it will be important to direct which type of leave will be determined to be taken first in employment contracts).

Under the reforms, the government chose to maintain the distinction between holiday pay for "Euro" leave and holiday pay for "UK" leave so workers will continue to have a minimum entitlement of four weeks at "normal pay" (factoring in commission and overtime) and 1.6 weeks at basic pay.

Under new regulation 16(3ZA) of the Working Time Regulations 1998, from 1 January 2024 a week's pay for either:

• All leave for irregular and part-year workers (who are entitled to holiday pay under regulation 15B).
• For the first four weeks of "Euro" leave for all other workers

must include:

• Payments, including commission payments, which are intrinsically linked to the performance of tasks which the worker is obliged to carry out under the terms of their contract.
• 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 the worker in the last 52 weeks.

• Payments, including commission payments, which are intrinsically linked to the performance of tasks which the worker is obliged to carry out under the terms of their contract.
• 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 the worker in the last 52 weeks.

It is really important that your holiday pay does factor in the above elements for all workers (either for all leave if easier, but for at least for the first four weeks "Euro" leave where you are maintaining a distinction between holiday pay for different types of leave for workers who are not irregular or part-year workers and you have dictated in contracts that "Euro leave" will be deemed to be taken first).

From 1 January 2024, workers have the right to carry over

From 1 January 2024, workers have the right (under regulation 13, regulation 13A and regulation 15D of the Working Time Regulations 1998) to carry over:

• All of their holiday where they are unable to take some or all of their leave as a result of taking a period of statutory family-related leave.
• All their holiday if they are irregular or part-year workers or their 4 weeks "Euro" holiday where they are not irregular or part-year workers and where they are unable to take some or all of their leave as a result of taking a period of sick leave (although it must be taken within 18 months of the leave year to which it relates).
• All their holiday if they are irregular or part-year workers or their 4 weeks "Euro" holiday where they are not irregular or part-year workers and where in any leave year, you as employer fail to: recognise a worker's right to annual leave or paid annual leave, 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 you as employer.

It will be important to ensure that you have systems in place to:

• Remind workers of their holiday entitlement regularly, encourage them to take it and communicate that they will lose it where they choose not to take it.
• Make sure that accrual for holiday during sick leave and maternity is in line with the new rules.

If you need more clarity on any of these issues please contact a member of our Employment team below.