Government publishes guidance on holiday reforms from 1 January 2024.

The Department of Business & Trade has published new guidance,  Holiday pay and entitlement reforms from 1 January 2024, to reflect the changes to the Working Time Regulations 1998 (WTR) which came into force at the start of this year. The most significant of these changes cover the holiday leave and pay rules for part-year and irregular hours workers.

Employers should note that their current arrangements for holiday leave accrual and holiday pay are likely to be contractual and that any changes to these must be agreed with the worker (or in some cases with the recognised trade union) in line with normal employment law principles. Employers are encouraged to seek legal advice when considering changes to or clarification of holiday leave and pay entitlements.

The new guidance is not statutory and it should not be relied upon in specific cases or in preference to the statutory wording. We note for example, that one of the examples of a part-year worker given in the guidance does not mirror the statutory wording.

The statute defines a part-year worker as one required to work only part of the leave year, with periods within that year of at least a week which they are not required to work and for which they are not paid. This suggests that term-time only workers who are only contracted to work, say, 39 weeks per year, but are paid an equal salary each month, would qualify as part-year workers under the new law.

The guidance on the other hand suggests that a worker will not be a part-year worker if they are paid an equal salary each month of the year, but have some weeks where they are not paid and not working. There is potential for employment tribunal claims arising from this kind of ambiguity in interpretation of the amended WTR and we will need to await appeal decisions to have more clarity.

Changes taking effect from 1 January 2024

The following changes have already come into effect:

Carrying over holiday leave

The new rules clarify previous case law principles on how much annual leave workers can carry over when they have been unable to take it because of family-related leave or sick leave.

All workers are entitled to carry over to the next leave year up to 28 days' statutory leave if they have not been able to take it because of maternity and other family-related leave.

Irregular hours and part-year workers are entitled to carry over up to 28 days' statutory leave if they have not been able to take it because of sick leave. This carried over leave must be taken within 18 months of the end of the leave year in which it accrued.

Workers with normal hours working all year round who have not been able to take annual leave because of sick leave are entitled to carry forward up to 20 days' statutory leave into the following leave year. Again, this carried over leave must be taken within 18 months of the end of the leave year in which it accrued.

From 1 January 2024, workers are no longer able to carry over leave they have been unable to take due to Covid. Leave accrued and carried over for this reason prior to 1 January 2024 must be used on or before 31 March 2024.

What is included in "normal" remuneration for holiday pay purposes?

The new rules set out the elements which must be included in the calculation of holiday pay for the 4 weeks' statutory leave under Regulation 13 WTR, codifying the previous case law in this area. These are listed as:

  • payments, including commission payments, intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out;
  • payments relating to professional or personal status relating to length of service, seniority or professional qualifications; and
  • other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

While this brings some clarity, there remains some doubt as to what will constitute a regular payment for this purpose, and it is likely that the courts will continue to consider the meaning of this in future cases.

Changes coming into effect on or after 1 April 2024

It should be noted that the following key changes will only apply to leave years starting on or after 1 April 2024:

  • holiday leave accrual for irregular and part-year workers will be calculated as 12.07% of actual hours worked in a pay period;
  • a new method to work out how much leave irregular hours or part-year workers accrue when they take family related leave or sick leave; and
  • rolled-up holiday pay as an alternative method to calculate holiday pay for irregular hours workers and part-year workers.

Employers should note that there may be a significant lead in time for these changes depending on the timing of employee holiday leave years. For example, where the leave year runs in parallel with the calendar year, these rules will not come into effect for that employee until 1 January 2025. It is possible that different workers in your organisation will have different leave years, and so care should be taken to ensure changes are not brought in for workers before the new rules actually apply to them.

Holiday accrual for irregular and part-year workers

New accrual calculation

The new rules will allow employers to calculate leave accrual on an hourly basis. For each hour worked, the worker will accrue 12.07% of an hour in statutory leave.

The 12.07% figure is only accurate where workers are entitled to statutory leave only – that is the pro rata equivalent of 5.6 weeks' leave. This is because it is based on total working weeks in a year of 46.4 (52 weeks minus 5.6 weeks of leave): 12.07% of 46.4 is 5.6. Workers with additional contractual leave will have a higher percentage accrual rate than this.

It is to be hoped that these new rules on holiday accrual will assist employers to calculate how much leave workers are entitled to when they do not have normal hours or only work for part of the year. However, there may still be uncertainty when it comes to calculating how many hours' leave a worker with irregular hours has taken when they take a day's leave.

Working out accrual of annual leave when on family-related leave or sick leave

The new rules will allow employers to work out how much annual leave a worker accrued when on family-related leave or sick leave by looking back at a 52-week relevant period before the leave period to work out the average hours worked. This will not include any weeks where the worker is on family-related leave or sick leave but will include weeks which are not worked for other reasons. If the worker has not worked for the employer for 52 weeks, the relevant period is shortened to the number of weeks the worker worked for the employer.

Rolled-up holiday pay

The new rules will give employers the option of paying irregular and part-year workers "rolled-up holiday pay" which is currently unlawful following previous case law decisions.

Rolled-up holiday pay occurs where employers include an additional amount with every payslip to cover a worker's holiday pay. The worker is paid holiday pay alongside other pay and not when they actually take the leave.

Under this method, holiday pay for statutory leave will be 12.07% of a worker's total pay for the pay period. However, this will not be accurate where the worker is entitled to additional leave under their contract: in that case a higher percentage will apply.

If this method is chosen, it will be important to ensure that the amount of holiday pay being paid in each pay packet is clearly set out in the payslip so that there is a record of how much holiday pay has been paid.

Employers will still need to ensure that workers are enabled and encouraged to actually take their annual leave and they should be able to evidence that they have done so.

Next steps

Employers should review employment contracts and holiday policies in the light of these changes and ensure they plan for any proposed changes in good time before the desired implementation date, including seeking legal advice on the proposals, the consultation process and timeline, as well as on draft policies and contractual documentation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.