New year, new holiday pay rules: what do the Government’s new Employment Rights Regulations mean for employers?

After initially proposing changes last year, the Government’s new regulations relating to holiday pay and changes to the Working Time Regulations came into force on 1 January 2024. The new regulations contain some significant changes and aim to simplify or consolidate some of the processes for certain categories of workers.

The Government has chosen to maintain many of the EU rules on holiday already in force, with a few changes and additions. It is important that all employers are aware of the changes so that they can identify whether any of their employees or workers are likely to be affected.

When do the rules apply?

Although the Regulations came into effect on 1 January 2024, they only begin to apply for an employer’s leave year beginning on or after 1 April 2024.

This means that for organisations whose annual leave year runs from 1 January to 31 December for example, the new rules will apply from 1 January 2025.

‘Irregular hours’ and ‘part year’ workers

Before reviewing the changes themselves, it is important to understand some of the categories of workers that these regulations refer and apply to. ‘Irregular hours’ and ‘part year’ workers are defined in the regulations.

Irregular hours workers are workers whose number of paid hours worked in each pay period is, under the terms of their contract, “wholly or mostly variable”. This includes workers with an irregular number of hours, not those with irregular working patterns but a fixed number of hours. It may cover positions such as healthcare bank workers or hospitality workers on zero hours contracts, with no consistent or guaranteed contractual hours.

Part year workers are workers who are required to work only part of the year, with periods of at least a week where they are not required to work and for which they are not paid, such as teachers or seasonal workers.

What are the main changes?

Holiday accrual for irregular hours and part time workers

The way in which irregular hours and part year workers accrue annual leave is changing as a result of the new regulations. This follows a Supreme Court ruling (Harpur Trust v Brazel) which caused significant difficulties for employers in calculating the holiday pay for these workers.

Under the new regulations, these workers will accrue annual leave entitlement for each pay period at the rate of 12.07% of the number of hours that they have worked during that pay period. A ‘pay period’ is the period for which the worker is paid, such as monthly, weekly, or fortnightly etc.

This means that instead of automatically being entitled to a full 5.6 weeks’ pay at the start of each holiday year, regardless of the hours they work, these workers will now build up their holiday entitlement as they work.

Unless contractually agreed, accrued holiday is capped at a maximum of 28 days per year. Employers also have the option to provide these workers with more holiday than technically accrued, but again, this has to be contractually agreed and documented.

Although there remains some ambiguity in relation to how or when these workers should be taking the accrued holiday (considering their types of contract), this provision is likely to be helpful for employers, particularly those who engage these types of workers on a large scale.

Rolled up holiday pay

Rolled up holiday pay is where an employer rolls up a payment of basic pay and holiday pay into one consolidated payment.

Although previously commonly used, this practice was ruled unlawful several years ago by the European Court of Justice in a case called Robinson-Steele, where the court commented that the practice would risk discouraging workers to take leave.

These new regulations have reintroduced the provision of rolled up holiday pay for certain workers, provided that:

  • the worker is a part year or irregular hours worker
  • holiday pay is calculated at 12.07% of all pay for work done
  • 07% is paid at the same time as the pay for the work done
  • the holiday pay is itemised separately on the worker’s payslip

It will not be compulsory to pay holiday in this way, however this reintroduction will be of benefit to organisations who engage irregular hours workers due to the difficulties in calculating holiday through any other method.

Assuming that the worker is eligible to receive it, using rolled up holiday pay allows employers to simply add a supplement onto an hourly rate of pay for work to satisfy their legal obligations (provided that the supplement is appropriately itemised on the payslip).

It should be noted, however that there is still a responsibility on employers to ensure that workers take their full statutory holiday entitlement (5.6 weeks). This obligation remains regardless of whether that holiday time is paid as part of normal annual leave or has been paid via rolled up holiday pay. If using rolled up holiday pay, it means that the worker’s remaining holiday entitlement over and above what they have been paid via rolled up holiday pay will be unpaid.

Carrying leave forward

Under the new regulations, workers will continue to automatically be able to carry over 4 weeks of statutory leave, if the employer has not:

  • recognised their right to paid annual leave
  • given them a reasonable opportunity to take leave or encourage them to do so, or
  • warned them of the risks of losing their annual leave entitlement at the end of the holiday year

This is an important provision for employers to be aware of, as it highlights the risk of misclassifying someone as self-employed. Should someone be wrongly classified as self-employed when in fact they satisfy the conditions of worker status, they will be entitled to statutory holiday, and any employer relying on their self-employed status, may fall foul of this provision.

Carried over holiday under this provision cannot be carried forward beyond the end of the first full leave year where the employer has acknowledged the worker’s rights to do so.

Other provisions for carrying over leave are also included in the regulations:

  • Where workers are unable to take annual leave due to family leave, they will be entitled to carry forward the full 5.6 weeks of statutory leave entitlement.
  • Where workers are unable to take annual leave due to being on sick leave, they will be entitled to carry forward the 4 weeks of EU statutory leave. However the carried over leave must be used within 18 months of the end of the holiday year in which the entitlement arose.

How can employers prepare for these changes?

There are a few steps that organisations can take to ensure that they are prepared for when these regulations come into effect for them:

  • Check you are properly accounting for overtime, commission and allowances in holiday pay when accruing leave under the new provisions.
  • For irregular hours/part-year workers, check your systems are set up to calculate accrual of holiday accurately under the new provisions.
  • Check that any workers for whom you want to use rolled-up holiday pay meet the criteria for you to do so.
  • Review your processes for reminding workers to use their holiday entitlement and the rules on losing their unused holiday entitlement.
  • Review your workplace policies to ensure that the new regulations are incorporated.

Our dedicated team of employment specialists are here to support and advise you on all your organisation’s employment law needs. Visit our dedicated employment law page to find out more and contact the team.