New regulations shake up holiday entitlement and pay

Employers are expected to adopt a new system for calculating annual leave for irregular hours and part-year workers with holiday years starting on or after 1 April 2024

The government’s recent reforms are set out in the Working Time Regulations and include the introduction of the holiday entitlement accrual method, as well as the option of rolled-up holiday pay for irregular and part-year workers.

The reforms were made to address a disparity in the Supreme Court decision in the case of Harpur Trust v Brazel 2022. This ruled that term-time workers were underpaid using the traditional pro-rated method to that of a full-time worker, and so a different method should be used. However, the ruling resulted in part-year workers receiving a greater holiday entitlement than part-time workers on the same hours. The judgment was reversed after the government launched a consultation to address the disparity.

‘This is the biggest change to the holiday pay element of the Working Time Regulations since they were introduced over 25 years ago, so it’s very significant,’ asserts Susan Galashan, Senior Consultant in Employment Law & HR at NatWest.

Which workers are affected?

• Workers with irregular hours – agency workers, casual staff, those with zero hours contracts
• Part-year workers – such as seasonal or term-time only, where the contract says there’s at least one week where they won’t be paid. However, it’s worth remembering that if they’re paid in equal instalments over the year then there are no weeks when they do not receive pay so they don’t meet the government’s definition of a part-year worker

What are the new rules?

The aim is that holidays accrued are proportionate to hours worked for irregular hours and part-year workers. Time off will accrue at the end of each pay reference period (when a worker is paid, often monthly or weekly), at 12.07% of hours worked during that pay period.

For a worker who clocks up 52 hours in May, for example, an employer would calculate 12.07% of 52 hours, which is 6.2 hours for that pay reference period.

‘You round this up if your figure comes to 0.5 of an hour or more and you round down if it’s less than that, so in this case it would be six hours,’ explains Susan.

‘The 12.07% figure is based on the statutory minimum holiday requirement of 5.6 weeks’ leave but some employers may choose to offer more than the minimum holiday entitlement and will then need a higher multiplier than 12.07%.’

Holiday pay is based on the average hourly rate of pay over the previous 52 weeks.

When will this change take place?

The reforms were applied to leave or holiday years beginning on or after 1 April 2024. This means that if some workers started their holiday year back in January, then the new rules won’t apply until their new holiday year starts in January 2025. Susan also points out that employers can start holiday years in April for new variable hours workers while existing employees remain on their current holiday year contracts.

Maternity, family-related leave and sick leave pay

During maternity or family-related leave, a worker would continue to accrue leave. Annual leave cannot be taken during maternity leave. Some other types of family-related leave can be taken with annual leave in between. The government states that maternity, family-related, or sickness leave should not be included when calculating average weekly hours worked.

Rolled-up holiday pay

Holiday pay and holiday accrual are two separate things, says Susan. ‘The accrual is the 12.07% of hours worked and everyone gets to accrue the time off. But there are now two ways of paying for that time off for irregular hours and part-year workers – the most straightforward is rolled-up holiday pay.”’

For leave years starting on 1 April 2024, rolled-up holiday pay allows employers to include an additional amount in every payslip to cover a worker’s holiday pay instead of paying it when a worker is actually on annual leave.

‘Employers will be pleased to have the option to use rolled-up holiday pay but it’s a big change to terms and conditions. We’re suggesting they need to agree the variation in terms with their existing employees as it will be unpaid at the time they take it off so might affect areas such as budgeting,’ she adds.

Changes to annual leave carryover

From 1 January 2024 additional regulations were published on the carryover of annual leave. Holidays that were missed due to taking statutory leave such as maternity and family-related leave, or due to sick leave, can be carried over into the next year. A worker will be able to carry forward leave missed due to sickness absence as long as it’s taken within 18 months of the end of the accrual year.

Irregular hours and part-year workers who were off sick can now carry over up to 28 days as long as it’s taken within that same 18-month time period.

Susan reminds us that the new regulations put the onus on employers to prove they’ve engaged with individuals to avoid the following scenarios:

• Not paying a worker their paid leave entitlement
• Not providing reasonable opportunity and encouragement to take time off
• Failing to inform the worker that they must take their leave to prevent it from being lost

In the case of any of the above scenarios, individuals would be allowed to carry over holidays.

Other considerations for annual leave pay

The new regulations provide extra information and clarity on how to calculate a week’s holiday pay correctly.

For those on set working hours but who also receive commission or regularly work overtime, basic pay for at least four weeks of holidays should include an average of those extra payments. This can be calculated by adding up the extra payments over 52 weeks leading up to the holiday and dividing by 52. Don’t include unpaid weeks, and weeks in which there was any sick leave or statutory leave.

These additional payments are included in all holiday pay for variable hours workers because that is based on a 52-week average of all remuneration.

This article first appeared on the NatWest Business Insights page here.

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