Key changes to holiday entitlement and holiday pay due early next year

The Government released draft legislation yesterday to implement important changes to holiday rights under the Working Time Regulations. This draft legislation - most of which is due to take effect on 1 January 2024 - sits alongside the Government’s response to two consultations on these changes which were also released yesterday.

The draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (“ER Regulations”) still need to complete the final stage of the legislative process but significant changes are not anticipated. The Government has also released draft legislation detailing certain restatements of equality law, which we will cover in a separate blog.

Changes for atypical workers

The ER Regulations will make key changes to holiday rights for certain atypical workers, namely those workers with irregular hours or who only work part of the year. These changes will apply for holiday years starting on or after 1 April 2024. The changes include:

1. A new method of holiday accrual for these workers. This stems from confusion following the Supreme Court’s decision in Harpur Trust v Brazel last year which resulted in part year workers having more holiday entitlement than part time workers who worked the same number of hours on an annual basis. Under the new legislation, employers are permitted to calculate holiday entitlement for irregular hours and part year workers as 12.07% of the hours worked in a pay period. This does not affect how holiday entitlement should be calculated for regular hours workers.

1. Sitting alongside this, the ER Regulations permit employers to choose to pay rolled up holiday pay for irregular hours workers and part year workers – i.e. they will be allowed to pay a “holiday pay enhancement” on top of the worker’s wages. Rolled up holiday pay will need to be calculated using the worker’s total earnings over the relevant pay period. Again, this does not apply to regular hours workers.

1. The ER Regulations also permit employers to use a new method for calculating holiday entitlement for irregular hours workers and part year workers who are on long term sick leave or family leave, including use of a 52-week reference period. However, the Government has scrapped plans to introduce an overarching 52-week holiday entitlement reference period for all employees and workers.

The ER Regulations state that a worker will be an irregular hours worker if, in that holiday year, the number of paid hours they work in each pay period during the term of their contract is (under the terms of their contract) wholly or mostly variable. This may, therefore, catch certain agency workers as well as some variable hours workers and zero hours workers.

A worker will be a “part year worker” if, in that holiday year, they are only required to work part of the year under the terms of their contract and there are periods within that year (during the term of their contract) of at least a week which they are not required to work and are not paid for. This is therefore likely to catch seasonal workers and some term time only workers.

Other changes

Other changes to be implemented by the ER Regulations include:

• revoking legislation introduced during the COVID pandemic allowing roll over of holiday for two holiday years in specified circumstances
• clarifying the scope of record keeping obligations in relation to working time
• minor changes to the Transfer of Undertakings Regulations to simplify consultation requirements for smaller employers or those conducting small TUPE transfers of fewer than 10 employees.

Restating the law

As well as making changes to the current working time regime, the ER Regulations are being used to restate some existing working time requirements that derive from EU case law. This is to avoid legal uncertainty when the EU Retained Law (Revocation and Reform) Act 2023 comes into force on 1 January. It will have the added benefit of ensuring that our working time legislation clearly spells workers’ existing rights in relation to paid holiday.

These restated provisions include:

• A definition of “normal” pay – which must be used to calculate holiday pay
• Specifying the circumstances in which holiday entitlement can be carried forward (for example in the case of long-term sickness, or where the right to paid holiday has been completely denied).

Conclusion

The changes are likely to have the most effect on those employers who utilise irregular hours workers extensively and those in the sectors who engage seasonal or part year workers. These employers have often had to grapple with how to calculate holiday for these types of workers and when holiday pay should be paid. The simplified accrual method and removal of the prohibition on paying rolled up holiday pay for such workers should hopefully make the process a lot smoother.