Draft reforms to UK holiday pay rules leave room for future changes

The first consultation response, concerning how holiday entitlements for part-year and irregular hours workers should be calculated, comes after a major Supreme Court ruling earlier this year. The decision means that workers who are only employed during some weeks of the year, but who have a contract which lasts for the full year, are entitled to a full year’s statutory holiday entitlement – 5.6 weeks per annum. The Supreme Court dismissed arguments that employers should be able to reduce part-year workers’ holiday entitlement on a pro-rata basis to account for weeks they have not worked.  

Following the ruling, the government published draft legislation to introduce an accrual method to calculate holiday entitlement for irregular hour workers and part-year workers, including agency workers. The proposed method would calculate entitlement at 12.07% of hours worked in a pay period – whether that is weekly, fortnightly or monthly for each employer – meaning that holidays are only accrued for time actually worked in a holiday year.

Stuart Neilson, employment law expert at Pinsent Masons, said: “Many employers used this percentage accrual method before the Supreme Court decision and continued to do so even after it. It seemed unfair to effectively give part-year and irregular hour workers a windfall of annual leave for time not worked in a year. This is a move which will be welcomed by employers and employer organisations such as the REC.”

The draft legislation also introduces rolled-up holiday pay for irregular hours workers and part-year workers – a system where a worker receives an additional amount or enhancement with every payslip to cover their holiday pay, as opposed to receiving holiday pay only when they take annual leave. Neilson said: “Although unlawful under EU law due to the risk of disincentivising the taking of leave, many employers also retained this long-standing practice as an efficient method of aligning holiday pay with pay actually received in a timely way. Employers will welcome the removal of legal risk around rolled-up holiday pay systems for irregular hours workers and part-year workers”.

Anthony Convery, employment law expert at Pinsent Masons, added: “Some employers pay a form of rolled up holiday pay for regular hours workers to factor in certain variable payments where needed. Employers do this either by applying a percentage uplift to overtime payments when overtime is worked or doing a ‘year-end’ reconciliation. This is not strictly compliant but should be capable of being offset if someone brings a claim as long as it is shown clearly on payslips. Although the draft legislation only introduces a legal framework for rolled-up holiday pay for irregular hours workers and part-year workers, the new legislation does not change the position in relation to rolled up holiday pay for regular hours workers.”

The draft legislation also restates EU case law in relation to carry over of annual leave when a worker is unable to take their leave due to being on maternity or family-related leave, such as maternity or paternity leave, or sick leave. Neilson said: “Many employers will already incorporate this practice into holiday policies but an express statutory entitlement makes clear the position will not change after Brexit.”

Of potentially greater impact are three new statutory carry forward entitlements.  A worker can carry forward leave untaken in a leave year or that has been taken but not paid if their employer fails to: recognise a worker’s right to annual leave or to payment for that leave; give the worker a reasonable opportunity to take the leave or encourage them to do so; or inform the worker that any leave not taken by the end of the leave year, which cannot be carried forward, will be lost. Convery said “Employers will need to build procedures into holiday pay systems to ensure that leave is not inadvertently carried forward. Although these principles are taken from EU law, workers are likely to have a greater awareness of these entitlements now they are codified as express statutory rights”.

A second consultation considered introducing a single pot of statutory annual leave at a single rate of holiday pay, rather than the existing separate EU and UK leave entitlements of four weeks and 1.6 weeks respectively. “Currently, EU leave needs to be paid at normal pay, which can include elements of variable remuneration such as bonuses and commission, while UK leave can be paid at basic pay excluding these variable payments for some workers. This adds complexity for employers and employees when calculating holiday entitlements,” Neilson said.

However, the government has rejected a proposal to create a single pot of statutory annual leave at a single rate of holiday pay. This would have replaced the two existing leave entitlements which have different minimum rates of holiday pay. Neilson said: “Many employers will be relieved that this change will not be introduced at this time. Although it would have simplified holiday pay calculations, many employers already pay all annual leave at a single rate based on normal remuneration.”

He added: “Other employers, which do pay different rates for the different leave entitlements, may not have wanted to absorb the increased costs that would likely have been associated with a single holiday pay rate. However, such employers will also have to take care to comply with a recent UK Supreme Court decision which favoured a composite approach to these ‘pots' of leave.”

Where rolled up holiday pay is introduced for irregular hour workers and part-year workers, however, the draft legislation applies a single rate of pay based on a worker’s total earnings in a pay period.

The draft legislation clarifies what should be included in normal remuneration for the purposes of EU leave to codify case law on this issue. This will include: payments, including commission payments, intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out; payments for professional or personal status relating to length of service, seniority or professional qualifications; and payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation.

Neilson said that employers will need to assess how this expression of normal remuneration fits with existing practices. “Employers may also need to consider whether any change to reflect the legislation will result in changes to terms and conditions, especially if a more generous outcome is achieved by existing employer practices as compared to the new legislation.”

Convery added: “The draft legislation leaves unanswered the question of what is regular within the 52-week reference period and this is likely to result in case law.”

The government has also addressed the effect of the pre-Brexit CJEU decision that held that EU member states must require employers to set up a system to measure the duration of time worked each day by each worker. This had the potential to have a significant impact regarding employers' record keeping obligations in relation to working time and went beyond the UK obligation. The draft legislation requires employers to keep adequate records. An employer need not record each worker’s daily working hours if the employer is able to demonstrate compliance with record keeping obligations without doing so.

“It is likely that some employers did adjust their working time record keeping practices to comply with the CJEU decision, and that could have been costly and administratively burdensome. Such employers will need to decide whether to continue record keeping to this higher standard or introduce a more proportionate system which is still effective to monitor and demonstrate compliance with working time requirements. Maintaining high standards of record keeping will be particularly important in sectors where working time compliance, including rest breaks, represents a health and safety risk,” Neilson said.

Convery added: “The consultation says that the government will assess the impact of the reforms and this will allow it to consider more fundamental reforms to the rate of holiday pay. As employers adapt to the changes in the draft legislation, further reform is certainly a possibility.”