Background
As a result of its time as a member of the European Union, workers’ rights often have elements based in part on pure UK law as well as laws retained from the EU. For instance, employees currently have two components to their holiday entitlements which are calculated on different wage rates. This includes four weeks’ Annual Leave based on European Union laws and an Additional Leave of 1.6 weeks solely based in UK law. This has led to some unnecessary complexity.
Furthermore, in a recent UK Supreme Court ruling (Harpur Trust v Brazel) it was decided that part-year and irregular hour workers are entitled to the same basic Annual and Additional leave allotment as full time workers, 5.6 weeks of paid holiday per year, and not a pro-rated amount as had been customary practice.
As a result of confusion surrounding leave calculations and this ruling, the UK government, seeking to clarify annual leave carry over and pay calculations, published two policy documents seeking feedback from the public. Based on that feedback, the UK government has introduced the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023. Employers now have more clarity regarding how to deal with these issues.
Key details
Holiday carry over and calculation rules
The Regulations codify established case law on holiday carry over and calculation for all workers with no changes to current practice as stated below.
Holiday pay calculation rules:
Workers will remain entitled to four weeks of Annual leave paid at normal pay and an Additional leave of 1.6 weeks paid at basic pay. The government decided not to merge those two leave entitlements. The Regulations affirm that the four-week Annual leave allotment should continue to be calculated based on a “normal” pay rate which is composed of the basic pay rate and the following:
- Payments such as commissions that are intrinsically linked to workers’ job duties. The Regulations do not specifically address whether performance and discretionary bonuses should be included.
- Payments for professional or personal status relating to length of service, seniority or professional qualifications.
- Payments, such as overtime, that have been regularly paid to a worker in the preceding 52 weeks before the holiday pay calculation. The word “Regularly” was not defined in the Regulations and may be clarified at a later date.
For most workers, use of “normal” pay rate for calculation rules apply only to the four-week Annual leave entitlement. For part-year and irregular hour workers, it will apply to all statutory Annual leave calculations.
Carry over rules: Full time workers remain eligible to carry over their annual leave to the next year as follows:
- 5.6 weeks (includes Annual leave and Additional leave) may be carried over when the employee is on a family statutory leave.
- The four-week Annual leave may be carried over when the employee is on sick leave, however, carry over leave must be taken within 18 months of the end of the leave year.
- The four-week Annual leave can be carried over if the employer failed to:
- Acknowledge their employees’ right to take their holiday or to receive payment for iT
- Warn their employees that they may lose their right to the holiday if they fail to take it
enable or encourage their employees to take their annual holiday.
- From 1 April 2024, the above-mentioned carry-over rules will apply to the full statutory leave entitlement (Annual leave and Additional leave) for part-year and irregular hour workers.
In addition, under the Regulations, effective 1 January 2024, no category of worker will be able to carry over their Annual leave entitlements for Covid 19 related reasons.
Holiday calculation for part-year and irregular hour workers
Effective 1 April 2024, the Regulations reverse the Harpur Trust v Brazel requirement that part year and irregular hour workers receive the same annual leave allotment as full-time workers of 5.6 weeks. The Regulations codify the prior general practice that holiday accrual for part-year (including seasonal and term-time workers) and irregular/variable hour workers (includes zero hours workers) will be at 12.07% of the hours worked in a pay period, up to a maximum of 28 days.
Rolled up holiday pay
Rolled up holiday pay is a system allowing companies to include their workers’ holiday pay with their basic pay, instead of when they take their holiday. The system results in an increased hourly rate for the worker and removes the employer’s administrative burden of having to calculate their workers holiday entitlements. This system, which was forbidden in 2006 following EU Court of Justice case law, will now be allowed for part-year and irregular hour workers on the basis of 12.07% of the hours worked in a pay period. Employers will also be required to ensure workers do take their holiday entitlement every year.
Next steps
Employers should start preparing for compliance by auditing their worker populations, determining into which class each employee falls, reviewing how their annual leave carry over and pay entitlements are currently calculated and amend calculations and processes as necessary along with employment agreements. Employers should also amend their internal policies to clarify what elements of pay are included in annual leave pay, how to handle holiday carryover requests and create an internal process to ensure workers are reminded to take their leave with sufficient opportunity to take it.
Employers should create a process in their internal policies to distinguish between Annual and Additional leave entitlements taken by their employees throughout the year. According to UK case law, failure to clearly distinguish between Annual and Additional leave taken may result in the placement of all the holiday entitlement in one single pot requiring employers to calculate holiday pay for each day with a proportion of normal pay and basic pay, creating an additional administrative burden.
