20.11.2023

Holiday entitlement and pay has long been a complex area, with the evolving case law presenting plenty of potential pitfalls for employers. Following consultation earlier in the year, the Government has now published draft Regulations that are intended to restate and clarify certain aspects of the law, as well as introducing a new holiday regime for irregular hours and part-year workers. (These Regulations will not apply in Northern Ireland as employment law is a devolved matter there.) Below, we report on the key elements of the Regulations.

Retention of tiered holiday rights

Annual leave entitlement is currently comprised of three elements: four weeks’ leave under the Working Time Directive (“WTD”); 1.6 weeks’ leave under the Working Time Regulations (“WTR”); and any additional contractual leave (if granted by the employer), and different rights can attach to each of these types of leave. For example, case law provides that holiday pay for leave taken under the WTD should be based on a worker’s “normal remuneration”, including payments such as overtime and commission, whereas pay for WTR leave and additional contractual leave does not need to include these additional payments. In addition, the rights to carry forward holiday that is untaken, for example due to family-related leave or sickness absence, also depend on the type of holiday concerned. 

In its consultation, the Government had proposed amalgamating WTD holiday and WTR holiday into a single 5.6 weeks statutory entitlement. However, it will not be taking this proposal forward; “normal remuneration” remains payable for four weeks’ WTD holiday only, and carry forward rights still differ depending on the type of holiday. (See further below, however, for details of the different approach that will apply for part-year and irregular hours workers in the future.)

As a result, the issues raised by the Supreme Court’s recent ruling in Chief Constable of the Police Service of Northern Ireland v Agnew, are still very much live. The Court concluded that, despite most employers’ assumptions that WTD holiday is taken first in the leave year, followed by the remaining 1.6 weeks’ WTR holiday, followed by any contractual holiday, annual leave is not necessarily taken in any particular order. Rather, the default position is that all holiday entitlement forms a composite pot, if and insofar as it is not practicable to distinguish between the different types of holiday. Moving forward, employers therefore still need to assess their levels of risk arising from this case, and may need to refine their approach to calculating holiday pay and/or dealing with the order in which holiday is taken.  Come to our workshop on 29 November to learn more.

Restatement of EU-derived rights

The Retained EU Law (Revocation and Reform) Act 2023 received Royal Assent in June. While the proposal for this legislation automatically to “sunset” all EU derived laws on 31 December 2023 was dropped during the parliamentary process, the Act does still provide for certain effects of EU case law to be removed from our domestic law after that date, unless the Government legislates expressly to retain them. The newly published draft Regulations therefore restate some key principles from the EU case law on holiday entitlement and pay, to prevent them from disappearing come the new year. These “restating” provisions are due to come into force from 1 January 2024.

What constitutes normal remuneration?

The concept of “normal remuneration”, which must be paid for a worker’s four weeks WTD holiday entitlement, has been developed via a long line of case law. Without actually using the term “normal remuneration”, the draft Regulations have collected key principles from this case law to specify that, going forwards, pay for such holiday must include:

• payments, including commission payments, which are intrinsically linked to the performance of tasks which a 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 a worker in the 52 weeks prior to the period of holiday.

Note that the uncertainty that existed in the case law, e.g. the extent to which non-contractual commission, or discretionary bonuses, should be included in normal remuneration, has not been addressed by the draft Regulations, so there is potential for further litigation on these questions in the future.

Most employers have by now amended their approach to calculating holiday pay to provide normal remuneration for workers’ WTD holiday. However, any who still have not done so should now take action to ensure they adopt a compliant approach going forwards, as the Regulations make clear that the Government intends to maintain the requirement to pay normal remuneration for such holiday. 

Carry forward where holiday rights have not been respected

The draft Regulations restate principles from the EU case law, which allow workers to carry forward untaken WTD holiday if their employer fails to:

• recognise the worker’s right to annual leave, or to pay for such leave (e.g. because the employer has miscategorised them as self-employed);
• give the worker a reasonable opportunity to take leave or encourage them to do so; or
• inform the worker of the risk that any leave not taken by the end of the leave year, which cannot be carried forward, will be lost.

The right to carry forward WTD holiday that is untaken for these reasons ceases at the end of the first full leave year in which the employer complies with the above requirements. 

Carry forward where holiday is untaken due to sickness absence and family-related leave

The draft Regulations also restate the position derived from the EU case law about workers’ rights to carry forward holiday that they have not taken due to sickness absence or family-related leave. Helpfully, they also specify the duration of such carry over rights (a point that had previously been somewhat uncertain). Accordingly, workers can carry forward:

• Any of their four weeks' WTD holiday that they have not taken due to sickness absence. They must use any holiday carried forward on this basis within 18 months of the end of the holiday year in which it accrued, or it will be lost. 
• Any of their 5.6 weeks' statutory (i.e. 4 weeks’ WTD and 1.6 weeks’ WTR) holiday that they cannot take due to family-related leave. This right to carry forward only extends into the next holiday year.

The continued application of different carry forward rights for different types of leave means that the Supreme Court’s decision in the Agnew case (that the default position is for all holiday entitlement to form part of a composite pot – see above) may still impact the amount of leave a worker is entitled to carry forward in any given case. Come to our workshop on 29 November to learn more.

New holiday entitlement and pay regime for irregular hours and part-year workers

A major aspect of the Government’s consultation earlier this year was intended to address the decision of the Supreme Court in Harpur Trust v Brazel, in which the Court had determined that part-year workers on permanent contracts are entitled to 5.6 weeks of paid annual holiday, despite there being periods of the year when no work is done. This decision had caused significant concern among employers of part-year workers, and they will be relieved to discover that it is effectively overturned by the new Regulations. Indeed, the Regulations set out a whole new system for calculating holiday entitlement and pay for both part-year workers and irregular hours workers.  However, the drafting of the Regulations means that some other types of workers might also be covered, such as certain shift workers whom employers might up to now have regarded as having normal working hours (see below).

Note that, under this new regime, all statutory holiday entitlement for part-year and irregular hours workers appears to be treated as a single entitlement (i.e. with no distinction being drawn between WTD and WTR derived holiday). We assume this is because the 12.07% accrual method, discussed below, makes it extremely difficult, perhaps impossible, to identify which holiday is WTD holiday and which is WTR holiday for these workers.

Who is covered by the new system?

Part-year workers are defined as workers who are required under their contract to work only part of a year and who have periods of at least a week within that year which they are not required to work and for which they are not paid. Most obviously, this will cover workers who are employed all year round but only required to work during term-times, such as the claimant teacher in the Harpur Trust case. 

The definition of irregular hours workers is potentially more problematic in its breadth. It covers a worker if “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”. This clearly captures workers on arrangements such as zero-hours contracts, who we assume are the intended targets of the definition. However, it might also be interpreted as applying to other workers, such as those who work a regular rotating shift pattern with shifts of differing lengths that mean the total number of hours worked across each pay period will vary, or those whose contracts specify their standard working hours but also state that they must work such additional hours as may be required for the performance of their duties. Make UK’s Policy Team is liaising with contacts in Government to seek clarity on this point.

How will holiday entitlement accrue for these workers?

Part-year and irregular hours workers will accrue holiday entitlement on a pay period by pay period basis, rather than accruing their full annual entitlement at the start of the holiday year (as other workers do after their first year of employment). At the end of each pay period, the worker will be treated as having accrued hours of holiday equivalent to 12.07% of the hours they worked in the pay period. 

Where part-year and irregular hours workers take time off sick or for family-related leave, they will continue to accrue holiday, but their entitlement will be calculated as 12.07% of their average weekly working hours in the 52 week period prior to their absence. 

As to the reason behind the 12.07% figure, this is the 5.6 weeks statutory minimum holiday entitlement expressed as a percentage of the number of remaining (working) weeks in a year (46.4 weeks). Using this figure is intended to ensure that part-year and irregular hours workers’ statutory holiday entitlement remains proportionate to the entitlement of a regular full-time worker.

It’s worth flagging that the right of accrual at 12.07% is subject to a total cap of 28 days of holiday each year, although the Regulations provide no guidance on how the accrued entitlement in hours should be translated into days.

Note also that, since workers will only accrue their holiday entitlement on a pay period by pay period basis, employers may face requests from these workers to take more holiday than they have technically accrued at any given point in the year. It will be up to employers how they wish to approach this, although they will still need to comply with the terms of workers’ contracts in this regard. 

How is holiday pay calculated for these workers?

The Regulations provide for a modified application of the week’s pay provisions in the Employment Rights Act 1996 to calculate holiday pay for part-year and irregular hours workers. 

It’s worth noting that, for these workers, the provisions on normal remuneration (discussed above) are stated to apply in respect of their full statutory holiday entitlement. 

Can employers provide rolled up holiday pay instead?

The new Regulations will permit employers to pay "rolled up holiday pay" (i.e. provide holiday pay at the same time as basic pay, effectively “rolling” the payments together) to part-year and irregular hours workers, provided that they calculate it on the basis of 12.07% of all pay for work done, pay it at the same time as the worker is paid for the work done, and itemise it separately on the worker’s payslip. 

It will be for the employer to choose whether it wishes to pay rolled up holiday pay for these workers, or calculate and pay holiday pay, as for other workers, at the time that a worker takes holiday. Paying rolled up holiday pay will certainly be appealing for its simplicity, but moving to it is likely to require a change to workers’ contract terms and employers may need to take advice as to how best to go about this. 

In addition, employers that do adopt a system of rolled up holiday pay for part-year and irregular hours workers will still need to enable and encourage these workers to take at least 5.6 weeks of holiday each year, even though they won’t have to conduct separate holiday pay calculations at the time such holiday is taken.

Will rights to carry forward still be the same for these workers?

For part-year and irregular hours workers, the right to carry forward holiday where their employer has not respected their holiday rights, or where the worker has not taken their holiday due to sickness absence or family-related leave, will apply to all statutory holiday (i.e. no distinction will be drawn between the four weeks WTD entitlement and the 1.6 weeks statutory entitlement). 

When will the new system for part-year and irregular hours workers take effect?

The new rules are stated to apply to holiday years commencing on or after 1 April 2024. For those employers that operate their holiday year as a calendar year (i.e. the vast majority), in practice that means that the new system will come into effect from 1 January 2025. This long lead time will be helpful as it should give employers the chance to get to grips with the Regulations and conduct any necessary processes (consultation, etc.) to change workers’ terms if required. 

How we can help

As noted above, Make UK’s Policy Team is liaising with contacts in Government to seek clarification on the intended application of the new Regulations. We will keep subscribers updated with any information we receive in this regard.

Our practical, interactive workshop, “Holiday entitlement and pay: Agnew and beyond” (on Wednesday 29 November 2023 at 10am) will help you to assess risk areas and identify action points in light of the Supreme Court’s decision in the Agnew case. Click here to book your place. 

If you are a Make UK subscriber, you can speak to your regular adviser for guidance on your approach to holidays. Make UK can also assist with defending claims for underpaid holiday pay and engaging with employees and trade unions to address any employee relations issues in this area (please email us for further information). We will be updating our subscriber resources on holiday entitlement and pay to reflect the new Regulations in due course.

If you are not a Make UK subscriber, our expert HR and legal advisers can offer guidance on a consultancy basis. For further information, contact us on 0808 168 5874 or email [email protected].