Unwrapping Changes: Important New Holiday Pay Rules Come into Force for Employers

On 1 January 2024, the Government brought into force a raft of major amendments to existing holiday pay regulations.

In this article, we set out the key changes employers and HR practitioners need to know.

The changes to the Working Time Regulations 1998 (the regulations that, among other things, determine how holidays are accrued and paid) can be broadly divided into two types:

1. The introduction of new holiday accrual and pay rules for irregular hours and part-year workers (which apply to holiday leave years starting on or after 1 April 2024)
2. The codification of existing retained EU case law principles on holiday pay

It is important that these changes are understood and adopted where relevant so that employers can ensure compliance and avoid unnecessary breaches and holiday pay claims from workers.

In particular, employers who use irregular hours or part-year workers must review their methods for calculating holiday entitlement and pay and ensure this aligns with the new rules.

What is an irregular hours or part-year worker?

The regulations define such workers as follows:

• Irregular hours worker - A worker is an irregular hours worker if the number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable.
• Part-year worker - A worker is a part-year worker if, under the terms of their contract, they are required to work only part of that year, and there are periods within that year (during the term of the contract) of at least a week which they are not required to work and for which they are not paid.

New guidance by the Department for Business & Trade (which can be read here) explains these definitions in more detail and gives examples of the types of workers they may apply to.

How does holiday entitlement accrue for irregular hours and part-year workers?

There are no changes in how holiday entitlement accrues for normal workers and employees who are not on irregular hours or part-year contracts.

However, there is now a new method of holiday accrual for irregular and part-year workers. This change is intended to address complaints of the unfairness of such workers enjoying a greater holiday entitlement than regular workers (proportionate to the hours worked) because of the Supreme Court's previous decision in Harpur Trust v Brazel [2022] UKSC 21.

Holiday will be calculated in hours rather than weeks and will accrue on the last day of each pay period at the rate of 12.07% of the actual hours worked in that pay period.

However, an average over a 52-week reference period will be used to calculate the amount of holiday accrued during a period of sick leave or statutory leave (such as maternity or family leave).

Employees and workers are entitled to 5.6 weeks of holiday per leave year. It is well established that four weeks of this entitlement derives from EU law (referred to as "the four weeks" in this article), and 1.6 weeks derives from UK regulations (referred to as "the 1.6 weeks" in this article).

The two "pots" of leave, unhelpfully for employers and HR, have long been subject to different rules as to how holiday pay is calculated and holiday carry-over rights.

However, under the new rules, there is now no such distinction for irregular and part-year workers, who instead receive a single, unified holiday entitlement with a single set of rules and rights applying to all of it.

We consider the impact of this further below (see "What should be included in the calculation of a week's pay for holiday pay purposes?" and "The right to carry over holiday to the next holiday year").

How should holiday pay be calculated for irregular hours and part-year workers?

There are now two methods for an employer to choose from when calculating holiday pay for irregular hours and part-year workers:

1. They can calculate and pay holiday pay when the leave is taken using a 52-week average. In the same way that holiday pay is calculated for most workers, this is calculated at the rate of a week's pay for each week's holiday. Generally speaking, a week's pay will take the average weekly pay from the previous 52 weeks. A week's holiday will consist of the average number of hours worked in each week of the same period. This calculation should, in practice, result in an hourly rate for holiday pay that represents the average hourly rate for the worker over the previous year.
2. They can also now choose to pay rolled-up holiday pay instead. Instead of paying a worker for a holiday when they take annual leave, rolled holidays allow employers to regularly pay the worker an additional amount to cover their holiday pay for the year. Rolled-up holiday pay under the new rules is an uplift of 12.07% to the worker's remuneration for work done in each pay period. The worker will still, of course, be allowed to take their holidays, but they will be paid in respect of this in each pay slip during their employment, rather than their holiday pay being calculated at the time they take the leave. This offers a somewhat simpler calculation for employers, particularly where working hours vary.

If an employer intends to start using rolled-up holiday pay, they should inform their workers of this and mark it clearly on their payslips.

The calculation of holiday pay for these workers must include the extra items set out in the amended definition of "a week's pay" (see "What should be included in the calculation of a week's pay for holiday pay purposes?" below).

Separate from the above changes for irregular hours and part-year workers, the Government has also re-stated and codified numerous principles from EU case law that govern how the four weeks of holiday entitlement derived from EU law (separate from the 1.6 weeks derived from UK regulations) is calculated and paid for other employees and workers.

These are largely the same as existing rules that employers should already be following, but this move by the Government aims to put these case law principles down in writing within the regulations so as to make the rules clearer for employers and employees.

What should be included in the calculation of a week's pay for holiday pay purposes?

A week's pay when calculating holiday pay for the four weeks derived from the EU must include the following:

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

Employers should review their current holiday pay practices to ensure they are paying this compliantly with the above elements included where relevant.

This expanded definition does not apply to the 1.6 weeks' holiday derived from UK law, which continues to be calculated and paid using its own unchanged definition of a week's pay.

However, there are a few different approaches employers might choose to take:

• Pay all holiday entitlement at the "enhanced" rate, taking into account the above elements.
• Pay only the first four weeks of holiday in a leave year at the enhanced rate and then pay basic for the remaining 1.6 weeks.
• Pro-rate the enhancement and treat each holiday day as part of the four weeks and the 1.6 weeks. That is, assuming the individual has no extra-contractual holidays, the relevant percentages would be 71.4% (4/5.6 – for their four weeks) and 28.6% (1.6/5.6 – for their 1.6 weeks), meaning that the enhancement could be paid at the 71.4% of its full rate for all holiday taken.

As noted above, irregular hours and part-year workers no longer have separate "pots" of four and 1.6 weeks.

As a result, the above-expanded definition of a week's pay must be used for all holiday entitlement for irregular and part-year workers, whichever method is used to pay this (again, only applying to leave years beginning on or after 1 April 2024).

The right to carry over holiday to the next holiday year

In the same way, the Government has now re-stated and codified within the regulations a series of legal rights derived from case law, which set out when a worker may carry over the holiday from one leave year to the next and what limits there are on this.

Below, we have listed the situations under the new regulations in which a worker has the right to carry over a holiday.

It is important to note that they only apply to the four weeks' holiday derived from EU law, but not the 1.6 weeks derived from UK law (with one exception – the right to carry over in family-leave-related circumstances).

However, the 1.6 weeks (or part of it) may be carried forward if there is a "relevant agreement" between the parties enabling this.

For irregular hours and part-year workers, the carry-over rights listed below will apply to the entirety of their holiday entitlement. Additional regulations for such workers allow them and their employer to reach a "relevant agreement" on carry-over rights.  

Holiday carry-over rights

Subject to the above caveats, workers have a right to carry over if any of the following apply:

• Where they cannot take some or all of their leave due to taking a period of statutory leave (defined as any leave under Part 8 of the Employment Rights Act 1996, which includes maternity leave and other family-related leave).
• Where they cannot take some or all of their leave due to taking a period of sick leave, the carried-over leave must be taken within 18 months of the leave year to which it relates.
• Where in any leave year, the employer fails to:
  • Recognise a worker's right to annual leave or paid annual leave.
  • Give the worker a reasonable opportunity to take leave or encourage them to do so.
  • Inform the worker that leave not taken by the end of the leave year will be lost.

In such cases, the right to take the carried-over leave will last until the end of the first full leave year, in which there is no such failure by the employer.