Mastering 2024 Holiday Pay Reforms: A Detailed Employer's Guide in the UK

The Employment Rights (Amendment, Revocation, and Transitional Provision) Regulations 2023 (the Regulations) were introduced by the Government in November 2023, bringing about noteworthy alterations to the calculation and payment of holiday entitlement for part-year and irregular hours workers. A guidance document that sets out the changes to the Working Time Regulations was published on 1 January 2024.

This article aims to provide a thorough understanding of these changes, with a focus on the impact on employers.

1. Revised Holiday Entitlement for Irregular and Part-Year Workers

The new legislation, represents a significant shift in calculating holiday entitlement for workers with variable work patterns, following the Harpur Trust v Brazel case. For holiday years beginning on or after 1 April 2024, holiday entitlement will be calculated using an accrual method throughout the holiday year. Holiday Entitlement will accrue at 12.07% of hours worked in a pay period, rounded to the nearest hour.

Definition of Worker Categories:

• Irregular Hours Workers: These are individuals whose working hours vary significantly as outlined in their employment contract, including those on zero-hours contracts.
• Part-Year Workers: Workers who are employed for only a part of the year, with definite non-working periods for which they are not paid, such as certain term-time employees.

2. Adoption of Rolled-Up Holiday Pay

In a shift from prior EU restrictions, rolled-up holiday pay is now permissible for irregular and part-year workers, allowing a more flexible approach to holiday pay. This method involves including an additional amount for holiday pay with the regular wages throughout the employment, rather than paying it when the holiday is taken. The change applies for holiday years beginning on or after 1 April 2024.

Key Requirements for Lawful Implementation of Rolled-Up Holiday Pay:

• Clear Calculation: The holiday pay must be calculated at 12.07% of the worker's regular earnings during the pay period.
• Separate Itemisation: It is crucial that employers itemise holiday pay separately on the worker's pay statement, clearly distinguishing it from other wages.
• Simultaneous Payment: Rolled-up holiday pay should be paid concurrently with the regular pay for the work done, not at the time the leave is taken.
• Transparency and Communication: Employers should ensure transparent communication with their employees about how rolled-up holiday pay is calculated and paid.
• Record-Keeping: Maintaining accurate records of holiday pay is essential for demonstrating compliance with the new regulations.

3. Extended Carry-Over Provisions for Family-Related Leave

The regulations mandate carry-over of unused leave due to family-related leave, which includes:

• Maternity leave
• Adoption leave
• Shared parental leave
• Ordinary parental leave
• Paternity leave
• Parental bereavement leave

This aligns statutory law with existing case law, ensuring consistency and clarity. Furthermore, this requirement applies to the whole 5.6 weeks' annual leave entitlement.

4. Provisions for Long-Term Sickness

Addressing long-term sickness, the regulations now mandate the carry-over of up to four weeks of annual leave, derived from EU law, into the subsequent 18 months post the accrual year. This measure aims to prevent excessive accumulation of untaken leave. This applies only to the carry-over of four weeks' annual leave entitlement derived from EU law.

Employers should seek to ensure the following:

• Policy Updates: Employers should ensure their policies reflect this 18-month carry-over rule. Policies should be clear on how holiday entitlement is managed during long-term sickness.
• Record-Keeping: Maintain accurate records of employee absences and holiday accruals, including tracking the 18-month carry-over period.
• Communication: Regularly inform and remind employees on long-term sick leave about their accrued holiday and the carry-over limits.

5. Conditions for Annual Leave Carry-Over

In addition to family-related and long-term sickness leave, the regulations also specify conditions where employers must allow carry-over of leave. These include:

• When an employer fails to recognise a worker's right to paid annual leave.
• Lack of a reasonable opportunity for the worker to take their leave.
• Failure of the employer to encourage the worker to utilise their leave.
• Not informing workers that untaken leave cannot be carried forward and will be lost at the end of the holiday year.
• Situations where the employer permits leave but does not provide the corresponding pay.

This carry-over requirement applies only to the four weeks' annual leave entitlement derived from EU law.

6. Broadening the Scope of 'Normal Pay'

The definition of 'normal pay' for holiday pay calculations now encompasses a wider range of remunerations. This broader definition includes:

• Regular overtime payments.
• Commission payments that are intrinsically linked to the performance of tasks contractually obliged to be carried out.
• Payments relating to professional or personal status, such as those based on length of service, seniority, or professional qualifications.
• Other regular payments, whether contractual or not, that have been a consistent part of the worker's earnings in the preceding 52 weeks.

These provisions apply only to the four weeks' holiday derived from EU law, and to the payment of accrued holiday for irregular hours workers and part-year workers, although employers can choose to use the same method for all annual leave.

7. Employer Obligations for Annual Leave Management

Under the new framework, employers bear increased responsibility in ensuring that workers utilise their statutory annual leave. Failure to recognise, facilitate, or remunerate annual leave correctly will necessitate the carry-over of up to four weeks of EU-derived leave. This change underscores the importance of proactive leave management and clear communication.

8. Transitional Measures Post-COVID-19

Post-pandemic, the regulations address the carry-over of leave untaken due to COVID-19, setting a deadline of 31 March 2024 for any such outstanding leave.

Prospective Challenges and Opportunities for Employers

1. Increased Financial Outlay: The expanded scope of what constitutes holiday pay, including elements like overtime and commission, may lead to an increase in the overall financial commitments for employers. This aspect is particularly relevant for businesses where overtime and variable pay components form a large part of employee compensation.
2. Administrative Adjustments: Adapting to the new rules necessitates an overhaul of payroll systems. Employers must invest in updating their payroll software and training their HR personnel, which might be resource-intensive in the short term.
3. Enhanced Employee Relations: On a positive note, these changes can serve as an opportunity for employers to enhance their relationship with their workforce. Fairer compensation during holidays aligns with the growing emphasis on employee well-being and can foster a more motivated and committed workforce.
4. Legal Compliance and Risk Management: Staying abreast of these changes is crucial for legal compliance. Employers who effectively adapt to these regulations mitigate the risk of legal disputes, which can be costly and damage the company's reputation.
5. Long-term Financial Planning: The new rules may necessitate a re-evaluation of financial strategies, particularly for businesses that rely heavily on part-time or flexible workers. Budgeting and financial planning will need to be more dynamic to accommodate the changes in holiday pay calculations.
6. Competitive Advantage: For employers who proactively embrace these changes, there is an opportunity to position themselves as fair and employee-centric organizations. This could be advantageous in attracting and retaining top talent, especially in industries where competition for skilled workers is high.

Conclusion

In summary, while the forthcoming changes in holiday pay regulations pose challenges in terms of increased costs and administrative adjustments, they also offer opportunities for improving employee relations and enhancing the employer's brand. It is essential for businesses to approach these changes strategically, ensuring compliance while leveraging the potential benefits in terms of workforce morale and company reputation.