Reform of holiday rights: what employers need to know

Calculating holiday allowances can be tricky for any staff who work irregular hours. In an effort to simplify things, this year the government has introduced changes to the rules on holiday rights as part of reforms to some employment rights that developed from years of European and UK case law.

‘These changes were made following consultation, with the stated aim of simplifying the rules on holiday entitlement and pay,’ says Kalpesh Nakeshree, Head of Employment with Ware & Kay incorporating Pearsons & Ward. ‘They also address the potential unfairness of a Supreme Court decision that gave a term-time worker more holiday when compared to a someone who worked all year round for the same number of hours each year.’

Kalpesh highlights the changes and the importance of complying with the new rules, as well as outlining the benefits and how and when to take advantage of these.

What are the new rules?

Many of the new regulations clarify existing requirements, although there are some significant new rules.

Employers need to be aware of:

• the right to carry over holiday into the next holiday year when it has not been possible to take it due to sickness or family-friendly leave, when the worker was denied the right to take leave, or the worker was not told that they would lose their holiday if they did not take it before the end of the holiday year;
• the requirement to include payments such as overtime and commission in calculating holiday pay, although for some workers this does not apply to the full annual leave entitlement;
• new definitions of an ‘irregular hours worker’ and a ‘part-year worker’;
• a new requirement to accrue holiday entitlement in hours for irregular hours and part-year workers at 12.07% of actual hours worked in a pay period;
• a new mandatory method for calculating holiday entitlement for irregular hours and part-year workers while off sick or on family-friendly leave; and
• a new option to pay irregular hours and part-year workers ‘rolled-up holiday pay’: an additional sum for holiday at 12.07% of normal pay and not make any payment to the worker when they take leave, rather than calculating average pay.

Ensuring compliance

While the changes do provide some clarity and simplify some areas, holiday rights remain complex. Now is a good time to take stock and ensure that you are compliant, for example by determining which payments are included in holiday pay calculations and over what period of time the average is worked out. A worker can bring an employment tribunal claim for past shortfalls in holiday pay.

Advantages of the new rules

The option to pay rolled-up holiday pay to irregular hours and part-year workers is simpler than calculating holiday pay based on average pay over the previous 52 weeks.

Given the complexities of alternative methods, many employers continued to use rolled-up holiday pay for casual and zero-hours contract workers even though it was technically unlawful. Where employers are able to use the new rules, this will remove the possibility of being challenged for paying rolled-up holiday pay.

How and when to take advantage of the new changes

Employers wishing to adopt the rolled-up holiday pay option can only do so:

• where the worker meets the definition of irregular hours worker or part-year worker. Some casual workers, zero-hours workers, agency workers, and hourly-paid term-time workers are likely to fall within the definitions - but this will depend on the wording in their contracts and the exact working arrangements; and
• in relation to holiday years starting on or after 1 April 2024. This means for workers whose holiday year runs 1 January to 31 December, the changes for irregular hours and part-year workers only come into effect on 1 January 2025.

Now is a good time to assess if you can and wish to use the new rules. We can support you in taking steps to implement the changes. Remember that this may involve changes to contracts, which usually involves the worker’s agreement.

Practical steps for employers

It is important to:

• check policies, contracts, and practices to ensure that they are compliant;
• identify any workers who are likely to fall within the definitions of irregular hours or part-year workers and decide if you wish to pay rolled-up holiday pay;
• identify and introduce any contractual changes that need to be made to be compliant or to introduce rolled-up holiday pay;
• adjust payroll systems to process the accrual of holiday in hours for irregular hours and part-year workers and payments;
• ensure payslips itemise the element of rolled-up holiday pay; and
• set up systems to remind employees to take their annual leave and make it clear that they must ‘use it or lose it’.

How we can help

While the changes go some way to simplifying the rules on holiday entitlement and pay, they also bring in differences between the rules that apply to irregular hours and part-year workers and those that apply to other workers, for example overtime payments and allowances should be included in calculating holiday pay. Another area of complexity is ‘carry forward’: there are variations in the amount of holiday that can be carried forward and for how long, depending on the circumstances.

To support you, we can:

• set down the detail in clear and concise holiday policies;
• assess your additional payments to staff, such as commission and overtime and advise on which you need to include in calculating holiday pay and when;
• advise you on which workers come within the new definitions of irregular hours or part-year workers;
• check contract wording to ensure it is compliant;
• advise you on implementing contractual changes, to avoid breaching contracts; and
• draft new contracts to maximise the chance that those workers and new workers come within the new definitions so you can pay rolled-up holiday pay.

For more information please contact our Head of Employment, Kalpesh Nakeshree on York 01904 716000, Wetherby 01937 583210 or Malton 01653 692247 or email kalpesh.nakeshree@warekay.co.uk to see how we can assist.