This guidance note sets out the significant changes to the calculation of holiday pay that are expected to come into effect from 2024 and how these changes might affect both employers and employees.
It includes information about the concept of 'rolled-up' holiday pay as a way of calculating payment of annual leave for employees with irregular hours.
What to Include in Holiday Pay
There have been a multitude of holiday pay cases spanning the last 5 years in particular, ranging from first level decisions through to decisions from the Supreme Court. These cases have set out the requirements as to what needs to be included when calculating holiday pay. Very briefly, these have concluded that as a minimum, the following should be included:
Contractual commission and performance bonuses
Voluntary, compulsory, or non-guaranteed overtime (sufficiently regular in basis)
Part Year Workers and Those Working Irregular Work Patterns
Harper Trust v Brazel is the leading case for the calculation of annual leave for part year workers (e.g., employees working term time only or zero-hour employees with gaps in their working pattern across the year). The Supreme Court decision in this case means that part year workers are now entitled to receive more annual leave than part time workers who work regularly across the whole year.
Here it was held that part year workers are entitled to 5.6 weeks annual leave regardless of how much of the year they work. This is despite sometimes absurd results such as someone who only works for 2 weeks in a full year being entitled to 5.6 weeks annual leave and pay meaning they would receive more than double in holiday pay than their normal total remuneration for the year.
The Court also reconfirmed the use of rolled up holiday pay (the formula being - total hours worked x 12.07%) as unlawful and inaccurate, and as sitting outside the Working Time Regulations.
This position felt far from ideal for a lot of businesses.
One of the most difficult practical issues was the continuous need to calculate entitlement & pay for those who worked irregular hours for part of the year. This required employees to calculate each worker’s entitlement and pay each time they requested holiday.
A lot of businesses chose to ignore these findings and operate in a manner deemed unlawful.
Anticipated Holiday Pay Changes from 2024
From 2024, the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 will come into effect.
It is believed that these regulations will include:
Inclusion of Regular Overtime and Commission: Express provision and clearer definitions for regular non-guaranteed overtime and commission payments to be included in the calculation of holiday pay.
Reference Period Adjustment: An extension to the reference period for calculating average pay. Currently, the reference period is the 52 weeks prior to taking leave, but this could change to allow for a fairer representation of average earnings.
Treatment of Bonuses: There may be new guidelines on how certain types of bonuses are treated in the calculation of holiday pay.
Carry over: Express reference to the permitted carry over of leave for those off work due to sickness or taking maternity/family friendly leave. Any carried over leave not taken within 18 months of the end of the leave year to which it relates is lost.
In addition to this the Regulations are likely to include further provision for allowing carry over where an employer has failed to give an employee reasonable opportunity to take their leave in their current leave year.
Accrual of Leave and Rolled-Up Holiday Pay 2024
Rolled-up holiday pay is the method where holiday pay is included in a worker's hourly rate, rather than being paid when they take their leave.
As of now, rolled-up holiday pay is not compliant with the Working Time Regulations in the UK. Workers must receive their holiday pay at the time of taking leave. This restriction was born out of concerns that the practice discourages employees from taking leave as they are able to earn more holiday pay by staying in work.
From 2024, the Government has indicated that there will be new provisions regarding annual leave accrual allowing rolled-up holiday pay for part year, irregular hours and some agency workers.
Employees in these categories will be allowed to accrue leave and pay at a rate of 12.07% (based on the statutory minimum entitlement) in each pay period.
However, any such changes will need to ensure that workers are still able to take their statutory leave entitlement and pay will be based on total earnings in any given pay period.
This will come into play for any leave period starting after 1st April 2024.
What You Should Be Doing in Preparation for Holiday Pay Changes 2024
Employers will need to:
Review and adjust payroll systems to comply with the new calculation methods.
Update employment contracts and policies regarding holiday pay.
Ensure clear communication with employees about how their holiday pay is calculated.
These anticipated changes reflect a move towards greater transparency and fairness in the calculation of holiday pay, ensuring that employees are compensated more accurately for their time off while making methods of calculations easier for employers.
You should prepare for these changes by reviewing your current payroll practices and seeking further advice from us at Wirehouse if you believe any changes represent a variation to the methods you are currently using.