There have been some recent changes to the way in which holiday pay is calculated. Becky Hardy explains the answers, and questions, arising from the changes.
The basic principle of holiday pay is simple. Employees shouldn't suffer financially from taking time off that they are legally entitled to. This is relatively straightforward to achieve for people with fixed pay and hours; they just continue to receive the same pay during their annual leave. It gets a lot more complex if you have workers with variable pay and/or hours.
Case study: Harpur Trust v Brazel 2022
One way that employers could simplify holiday pay for their people with irregular hours, or part-year workers, was to use rolled-up holiday pay. This method saw employers paying an additional 12.07%[1] alongside wages, which represented the holiday pay earned from the hours worked. However, this was brought to an abrupt halt in 2022 when the Supreme Court ruled in Harpur Trust v Brazel that part-year workers continue to accrue holiday entitlement while they aren't working as long as they're still employed.
This decision revealed a misalignment between holiday entitlement and holiday pay for part-year workers and those with irregular hours (such as casual workers or people on zero-hours contracts). It was determined that holiday entitlement accrued during time employed – whether the individual was working or not – whereas holiday pay was calculated only by reference to weeks worked. To look at an extreme example, this meant that if someone was employed for a full year, but only worked for one-week, they would be entitled to 5.6 weeks’ holiday and the pay for each week of leave would be equal to the week worked. To put it simply, they would be entitled to more holiday pay than they had earned while working.
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Following the ruling, rolled-up holiday pay became unlawful and employers had to do a complex calculation to determine holiday pay.
As a result of the difficulties presented by the Supreme Court decision, and with the deadline looming for retained EU law, a consultation was announced regarding several aspects of holiday pay. The findings of this consultation were published in November 2023, alongside draft legislation which came into force as of 1 January 2024.
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So what has changed?
The new regulations change how holiday entitlement accrues for irregular hour workers and part-year workers; their entitlement is now 12.07% of hours worked in a pay period (as opposed to one-twelfth of the annual entitlement on the first day of each month regardless of how many weeks are worked). This applies to holiday years starting on or after 1 April 2024.
The change in entitlement means that rolled-up holiday pay is once again lawful for irregular and part-year workers, which was welcome news to many employers. In addition, the new regulations set out a definition for irregular hours workers and part-year workers with the intention of giving employers more certainty regarding who is eligible for rolled-up holiday pay. Under the new regulations, the definition of an irregular hours worker is someone whose contracted hours are wholly or mostly variable. This raises a number of questions, and arguably has introduced more ambiguity in an area the regulations were intending to simplify.
For employees who aren't irregular hours or part-year workers, the rules regarding holiday pay and entitlement haven't changed. Holiday accrues by reference to the length of employment, and holiday pay is based on average ‘normal remuneration’ for a minimum of four weeks out of 5.6 weeks, although in reality many employers choose to calculate the full 5.6 weeks at the average rate to avoid further complications. The regulations have now defined what's meant by ‘normal remuneration,’ including:
- payments, including commission payments, intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out
- payments relating to 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 preceding the calculation date
Again, while the aim of this was to provide certainty to employers, it has actually created questions. For example, an annual bonus is a payment linked to contractual duties. Should this form part of normal remuneration?
The consultation also looked at whether to create a single leave entitlement of 5.6 weeks, to replace our current system where four weeks is derived from EU regulations and 1.6 weeks from UK legislation. For now there will be no change, but it's on the agenda for a future review.
Holiday pay remains a complex area that should be given necessary caution. Common areas of risk include:
- employee with multiple pay rates
- regular additions to pay, such as bonuses, commission, and overtime
- getting the calculation of normal remuneration wrong
- assuming it is being correctly handled by payroll software.
For more insight and guidance, get in touch with Jas Jhooty.
[1] 52 weeks in a year less 5.6 weeks statutory holiday gives 46.4 working weeks. 5.6 weeks divided by 46.4 weeks is 12.07%, so if you pay someone an additional 12.07% of their pay during their working weeks this equates to 5.6 weeks’ holiday pay.
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