Member Article

The government has produced draft regulations which will make further changes to holiday laws in Great Britain. We look at what is planned and what it means for employers.

The government has been reviewing which European Union laws to retain and has taken that opportunity to consult about changes to holiday pay, resulting in the publication of draft regulations. We look at what is planned and what it means for employers.

No single annual leave entitlement

Currently, the Working Time Regulations 1998 (WTR) give workers in Great Britain (GB) two separate entitlements to annual leave:

1. Regulation 13 gives a right to 4 weeks’ paid annual leave. This derives from the UK’s former membership of the European Union (EU).
2. Regulation 13A then gives workers a separate right under domestic law to another 1.6 weeks’ annual leave.

Over the years, caselaw has established that a worker’s entitlement to pay during holiday can be different, depending on which type of holiday they are taking. As such, for GB workers, employers have been able to pay the ‘extra’ 1.6 weeks’ leave at the basic rate of pay only, not including any variable pay elements which case law has determined need to be included when calculating holiday pay for the 4 weeks of Regulation 13 leave. The government has decided to retain this approach, so in theory, the different types of leave can still be paid differently.

The draft Employment Rights (Amendment, Revocation and Transitional Provisions) Regulations 2023 (Draft Regulations therefore largely write the rules developed from caselaw into the statute books. The Draft Regulations say that, for the first 4 weeks of annual leave, a worker is entitled to a "week's pay" for each week of leave, including:

• Payments intrinsically linked to the performance of tasks they are contractually obliged to do (including things like commission);
• Payments reflecting seniority, length of service, or professional qualifications;
• Payments which have been regularly paid to a worker over the previous 52-weeks.

The regulation 13A leave (i.e. the ‘extra’ 1.6 weeks leave) can still be paid at basic pay only.

By continuing to treat the two types of leave differently, the Draft Regulations do not sit entirely comfortably alongside the recent Supreme Court decision in the case of PSNI & Others -v- Agnew & Others. One of the points the Supreme Court made in that case was that “if and in so far as it is not practicable to distinguish between different types of leave then all the leave to which the worker is entitled must form part of a single, composite pot”. Unless an employment contract is very clearly worded, therefore, it could potentially be difficult for an employer to say with complete certainty what type of annual leave is being taken on any particular day, so that they could safely pay basic pay for that day. Therefore, despite best efforts, some level of ambiguity, and therefore risk, remains for employers who still pay basic pay only for some holidays.

Carry over of holiday

The decision to keep the ‘two-pot’ annual leave arrangements means that the rules about how much annual leave can be carried over from one year to another won’t change. Where a worker has been unable to take at least 5.6 weeks’ annual leave in a leave year because they have been on maternity or other statutory leave, they can carry over the untaken part of that leave into the next leave year.  Where they have been unable to take any of their Regulation 13 leave (i.e. 4 weeks) in a leave year because they have been off sick, however, they can only carry over the untaken part of that leave, which must be taken within 18 months of the end of the leave year in which it was accrued. Simply put, this means those who have missed out on holidays because of sick leave have the right to carry over fewer holidays than those who have been on statutory leave.

The Draft Regulations also allow workers to carry over any accrued but untaken part of their 5.6 weeks’ leave where their employer has either failed to classify them correctly as workers (for example if they have been engaged on self-employed contracts by mistake); or to inform them that if they don’t take their paid holiday entitlement they will lose it; or to give them a reasonable chance to take their paid leave.

Irregular and part-year workers

Inflexible rules about holiday accrual and pay for atypical workers have long caused a headache for employers. The government has therefore tried to simplify the rules and the Draft Regulations define two sets of workers who can be treated differently in terms of their holidays. These are:

• Irregular-hours workers (whose hours are wholly or mostly variable, such as casual and zero hours workers); and
• Part-year workers (those who have at least one week each year when they do not work, who often include teachers who only work during term-time, and people who work on a seasonal basis). 

“Rolled-up holiday pay” is a term used to describe when a worker’s holiday pay is paid along with their regular pay, usually by way of an uplift to their hourly rate. ‘Rolling up’ a worker’s holiday pay has been unlawful since 2006, but has continued to be used by many employers because calculating holiday accrual and pay for atypical workers is so tricky. The Draft Regulations expressly allow employers to pay rolled-up holiday pay to irregular hours or part-year workers.  If employers do want to roll-up holiday pay in this way, they have to calculate the holiday pay at the rate of 12.07% of all pay received over the pay period and must separately itemise it on the worker’s pay statement.

In addition, to deal with concerns expressed by many employers following the Supreme Court decision in Harpur Trust v Brazel (which said pro-rating paid holidays for part-year workers was unlawful), the Draft Regulations expressly allow paid leave to accrue in hours in proportion to the hours worked. Again, paid holidays must accrue at the rate of 12.07% of hours actually worked.

These changes will apply to holiday years starting on or after 1 April 2024.

Record-keeping

Finally, EU case law currently requires employers to keep detailed records about daily working hours. The Draft Regulations will simplify this and only require employers to keep ‘adequate records’.

Tips

Subject to Parliamentary approval, the Draft Regulations will come into force on 1 January 2024. They will not apply in Northern Ireland. To get ready, employers should:-

• Check holiday pay is being calculated correctly. If workers get other payments on top of basic rate of pay, check whether these payments need to be included in holiday pay.
• If holiday pay has not been correctly paid, consider the options. The Draft Regulations present an opportunity to review practices, analyse risk, take advice, and make a plan.
• Consider whether employment contracts should be updated to clarify the order in which different types of leave is taken and paid.
• Audit consultancy arrangements to check that all workers are properly identified.
• Remind workers of their rights to paid annual leave and encourage them to take it.

 

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