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Law changes on holiday pay process

Author: ICAEW Insights

Published: 17 Jan 2024

A recent court decision has prompted simplification of the rules governing holiday pay, particularly for workers with irregular hours.
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The UK government’s response to a consultation on simplifying holiday pay clarifies the rules for employers using irregular hours workers. The draft legislation specifies how to calculate holiday pay for those earning a basic salary, plus additional elements such as commission or overtime.

Given the Supreme Court confirming that holiday pay liabilities can go back two years, employers must plan carefully for these changes to mitigate the risk of errors.

The holiday pay plans were published in a government response to the retained EU employment law consultation on 8 November 2023. This consulted on three areas:

  • record-keeping requirements under the Working Time Regulations 1998;
  • simplifying annual leave and holiday pay calculations; and
  • the consultation requirements under the Transfer of Undertakings (Protection of Employment) (TUPE) Regulations 2006.

The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 came into force on 1 January 2024. These regulations amend the Working Time Regulations 1998 and the 2006 TUPE Regulations as they extend to Great Britain.

For employers, accountants and bookkeepers, the headline changes to the working time regulations in Great Britain from 1 January 2024 are:

  • the requirement to record daily working time for workers is removed;
  • The Working Time (Coronavirus) (Amendment) Regulations 2020 are revoked. These regulations allowed workers to carry over untaken leave into the next two years if it could not be taken because their work was affected by coronavirus. Any leave that has been carried forward must be used before 31 March 2024; and
  • legislating for EU case law that allows a worker to carry forward leave if they have been unable to take it because of taking another statutory entitlement or sickness. So, for example, the working time regulations are specific that someone taking maternity leave or unpaid parental leave will be able to carry forward leave provided it is used within 18 months.

Ian Holloway, payroll and reward consultant, and member of ICAEW Tax Faculty’s Employment Taxes and NIC Committee, says: “The amendments only apply in Great Britain. So, if an employer operates UK-wide and applies the Northern Irish version of the working time regulations, these are unaffected by the 2023 legislation. This is an immediate area of confusion.

“Further, the consultation has not resulted in a merger of the three blocks of leave that a worker is entitled to. For a full-time worker, this is four weeks + 1.6 weeks + any additional leave as per the contract of employment. This has always been a source of confusion.”

The three distinct blocks of leave remain, each with different pay calculations:

  • four weeks payable at the worker’s ‘normal’ rate of pay;
  • 1.6 weeks at the worker’s ‘basic’ rate of pay; and
  • any contractual leave paid as per the contract of employment.

In addition, when it comes to the new carry-over rules, this only applies to the block of four weeks. Different rules apply to the other two blocks.

For the four weeks, the regulations help with the definition of what pay must be regarded as ‘normal’. Updated guidance from the Department for Business and Trade (point 5.1) explains this. However, what the government legislates as items of pay that must be included may not agree with an employer’s current interpretation of pay that is ‘normal’.

ICAEW suggests that employers clearly outline in their policies and procedures what they consider to be normal pay, at the same time ensuring that their payroll software can perform the calculation.

A further two changes relate specifically to holiday leave years that commence on and after 1 April 2024. Employers with leave years that align with calendar years will not have to apply these changes until 1 January 2025.

First, a definition of irregular hours workers and part-year workers is inserted into the working time regulations in Great Britain for the first time. The regulations now specify how leave must be accrued (12.07% of hours worked in the pay period) and state that leave ‘may’ be paid in instalments. This means that employers have the option of rolled-up holiday pay, paid at the time the worker is paid earnings. Rolled-up holiday pay is not mandated.

Second, the 2023 Regulations specify the rights of irregular hours workers and part-year workers to carry forward leave and how the 12.07% calculation must be performed when the worker is sick or taking another type of statutory leave (maternity, paternity, etc). Where it is not paid (ie, rolled-up) or carried forward because of sickness or another statutory leave entitlement, leave and pay can be carried forward to the following leave year.

Legal shift spurs reform

A 2022 Supreme Court decision declared the commonly used 12.07% calculation method unlawful, shifting the focus to length of service. The government has aimed to restore the 12.07% calculation for irregular hours, simplifying payroll and reducing costs. 

This change comes as a response to the Harpur Trust v Brazel 2022 case, where workers with gaps between work periods were underpaid using the 12.07% method. Until the first leave year starting on or after 1 April 2024, employers must stick to the Harpur Trust principles when calculating leave for irregular hours.

Commission and overtime regularly paid in the last 52 weeks are now specifically included in the updated pay legislation. This helps clarify ‘normal remuneration’, retaining some of the EU case law principles that confirmed normal pay encompasses various payments beyond basic salary. Although not a significant change, it provides employers with clearer guidelines for calculating holiday pay (or at least for the pot of leave that totals four weeks).

“Unfortunately, there are still some aspects of holiday pay entitlement that have not been clarified, such as what represents ‘regularly’ paid overtime,” says Charlie Barnes, Director, Head of Employment Legal Services at RSM.

“The previous case law on this point may now have little relevance given the effect of the Retained EU Law (Revocation and Reform) Act 2023, so employers will need to carefully consider their approach to calculating holiday pay to avoid the risk of non-compliance with the new legislation and possible litigation.”

Chartered accountants should stay informed about these changes, as they impact how holiday pay is calculated and may require adjustments in payroll processes and compliance procedures.

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