Legal update: Changes to holiday rules and other employment law reforms

Just before Christmas, the government passed the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, which came into force on 1 January. These regulations cover a number of areas:

1. They introduce new rules regarding holidays for irregular hour and part-year workers. These will bring two big changes for these workers:

• Changes to the calculation of holiday entitlement
• Giving employers the option to pay rolled-up holiday pay.

2. Adopting certain principles from EU caselaw on the calculation of holiday pay and when holiday can be carried over.
3. Bringing an end to the COVID holiday carry-over rules.
4. Changes to the rules on TUPE consultation.
5. Clarification on the extent of an employer’s obligation to keep records of working time.

The regulations apply to England, Scotland and Wales (the Northern Ireland Assembly would have to introduce separate legislation on this).

In this update, we’ll take you through the key points of this important legislation. We’re also running an exclusive webinar on 17 January to talk you through the changes – sign up here!

First, let’s take a look at the changes in store when it comes to holidays.

 

1. Changes to holiday rules for irregular hour and part–year workers

When are these particular changes coming into force?

These changes will apply to leave years starting from 1 April 2024. This means that if your holiday year runs from 1 January to 31 December, the changes will apply to your business from 1 January 2025 as this will be the first holiday year starting after 1 April 2024.

The changes will only apply to irregular hours and part-year workers.

How do you define an irregular hours or part-year worker?

A worker is an irregular hours worker if the number of hours they 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.” The pay period is how frequently the worker is paid. For example, monthly or weekly.

A part-year worker is someone who, under the terms of their contract, is required to work only part of the holiday year and there are periods within that year (during the term of the contract) of at least a week where they’re not required to work, and they’re not paid. Periods of sick leave and statutory leave are ignored for these purposes.

However…

Surprisingly, government guidance put out earlier this year to accompany the new holiday rules said that if a part-year employee is paid an annualised salary over 12 months but doesn’t work for periods of one week or more at a time, they wouldn’t be considered a ‘part-year worker’ for the purposes of the regulations – this is even though these weeks off will be factored into their salary calculation as unpaid. The guidance says that to be a part-year worker, they would have to receive no pay during the periods they’re not working.

It’s common for some part-year contracts – e.g. term-time only contracts – for pay earned during periods of work to be paid equally over 12 months to help the worker budget between their working and non-working periods. However, according to the guidance, this would take them outside the scope of the definition of a ‘part-year worker’ in the regulations.  We will keep a keen watch for any amendments to the guidance on this point, as our opinion is that they should fall into the regulation’s definition of a ‘part-year worker’.

What if a worker has more than one contract with the same employer?

To decide whether someone is working “wholly or mostly” variable hours when they’re working under more than one contract for that employer, their working hours will be looked at in the round.

Let’s now take a look at exactly what is changing.

 

Part 1: Change to the calculation of holiday entitlement

Under the new regulations, employers can choose to state that irregular hours or part-year workers’ holiday entitlement will now accrue on the last day of each pay period at the rate of 12.07% of the number of hours they worked during that pay period (capped at 28 days). This won’t just apply for the first year of their employment – in effect, irregular hours and part-year workers will continue to accrue holiday as they go.

Where the accrual in the pay period includes a fraction of an hour, this will be rounded down if it’s less than 30 minutes and rounded up if it’s more than 30 minutes.

For example, Sally worked 80 hours in January. The holiday entitlement she accrued in this month would be calculated as follows:

80 ÷ 100 x 12.07 = 9.65 hours

As this is over 30 minutes, the figure would be rounded up to 10, meaning that Sally accrued 10 hours’ holiday during January.

The figure of 12.07% is based on the percentage of holiday earned where the employee is receiving statutory minimum holidays of 5.6 weeks and should be adapted if the employee is entitled to more holidays. This can be calculated by:

Total number of weeks holiday entitlement divided by the remaining working weeks of the year x 100.

For example, Tariq is entitled to six weeks’ holiday.

6 ÷ 46 (being 52 weeks – six weeks’ holiday) = 0.1304

0.1304 x 100 = 13.04

When calculating Tariq’s holiday entitlement, his employer should take 13.04% of hours worked during the pay period rather than 12.07%.

What happens when the worker is on sick leave or statutory leave (like maternity leave)?

Workers on sick leave or statutory leave (essentially family-related leave like maternity, paternity, adoption leave, etc.) will continue to accrue holiday during these periods. The regulations set out a three-step process to calculate it (essentially based on looking at the average number of hours worked over the last 52 weeks and calculating 12.07%).

Step 1 – Calculate the average number of hours per week they worked during the 52 weeks, ending with the day before they went on sick leave or statutory leave (if they’ve not been employed for 52 weeks, take the full period of their employment).

Step 2 – Calculate 12.07% of the number of hours calculated in Step 1. This figure will be the number of hours of annual leave they’ll accrue each week during their sick leave or statutory leave.

Step 3 – To calculate the number of hours of annual leave they accrue during a pay period, take the figure in Step 2 and multiply that by the number of weeks in a pay period that they’re on sick or statutory leave.

Let’s look at an example:

Janet is a part-year worker who’s entitled to the statutory minimum of 5.6 weeks’ holiday.

Over a 52-week period, she worked 40 weeks for a total of 920 hours. She then took 40 weeks’ maternity leave. So, the holiday entitlement she accrued when she was on maternity leave would be calculated by:

Step 1 – Calculate the average number of hours Janet worked during the previous 52 weeks before she started her maternity leave. To do this, deduct her holiday entitlement from the 52 weeks (as these aren’t weeks she would have worked), which gives you 52- 5.6 = 46.4.

920 ÷ 46.4 = 19.827 hours per week worked on average.

Step 2 – To calculate the number of hours of holiday Janet will accrue each week when she is off sick, take the average number of hours she worked each week (19.827) and multiply it by 12.07%.

19.827 ÷ 100 = 0.198

0.198 x 12.07 = 2.389 hours per week

Step 3 – Calculate the number of hours of holiday accrued during Janet’s maternity leave by multiplying the number of hours of holiday leave accrued each week (2.393) by the number of weeks of maternity leave (40)

2.389 x 40 = 95.56

Rounded up or down to the nearest hour, this would be 96 hours.

So, Janet will have accrued 96 hours of holiday during her maternity leave.

 

Part 2: A new right for employers to pay rolled-up holiday pay

The second big change to holiday rules for irregular hours and part-year workers is the introduction of a new right for employers to pay rolled-up holiday pay.

This will only be permitted for irregular hours and part-year workers and must be paid at the rate of 12.07% of all pay for the work done. Again, this 12.07% is based on the statutory minimum holidays of 5.6 weeks, so if the worker is entitled to more holidays, the percentage of the rolled-up element would be higher.

Let’s look at some examples:

Caitlin is entitled to 5.6 weeks holiday and worked 25 hours in the week 13-19 May. She is paid weekly at an hourly rate of £11.30.

Caitlin has earned £282.50 that week. Her rolled-up holiday pay would be calculated as follows:

£282.50 ÷ 100 = £2.825 x 12.07 = £34.0977

Rounding up to the nearest penny, Caitlin’s rolled-up holiday pay for the week would be £34.10.

Had Caitlin’s holiday entitlement been six weeks, the £2.825 would have been multiplied by 13.04 rather than 12.07 to give a figure of £36.838 which when rounded up would bring her rolled-up holiday pay to £36.84.

REMEMBER: Rolled-up holiday pay uplift must be paid at the same time as the pay for the work done.

What if the worker is on sick leave or statutory leave (like maternity leave)?

Workers still need to be paid rolled-up holiday pay when they’re on sick leave or statutory leave, and it has to be paid each pay period during their absence.

Holiday pay should be based on the average rolled-up holiday pay the worker has received over the previous 52 weeks (if a worker has been receiving rolled-up holiday pay for less than 52 weeks, the average must be taken over that shorter period).

The government guidance differs slightly on this point. It says that rolled-up holiday pay in these circumstances should be calculated according to the average amount of the worker’s total earnings in each pay period during the previous 52 weeks (i.e. rather than averaging the rolled-up holiday pay they have received in the previous 52 weeks). Hopefully, that government guidance will be updated before the rules come into effect on 1 April but, in the meantime, the method of calculation set out in the regulations – i.e., the average of previous rolled-up holiday pay received – is the one you should follow.

IMPORTANT…

If you pay rolled-up holiday pay, it has to be itemised separately on a worker’s pay slip.

Workers receiving rolled-up holiday pay won’t get a payment when they take holiday, which could deter some people from taking their annual leave. You should remember that the right to annual leave is mainly about Health & Safety – you have a legal obligation to protect the Health & Safety of your workers, and rest is a key part of that. So, make sure you have systems in place to monitor and encourage the taking of holidays.

 

Any other points to consider at this stage?

Consultation with employees

Although these changes are available for employers to implement in holiday years starting from 1 April 2024, for existing employees this will involve a change to their contracts of employment. That means you’ll have to consult with them. If the number of employees involved is 20 or more, you need to follow a statutory collective consultation process. The period for collective consultation will be 30 days where 20 or more employees are involved or 45 days where 100 or more employees are involved.

Please contact our advice team on 0345 844 4848 or email us at hradvice@citation.co.uk for advice on how to navigate this process.

Contract clauses

We’ve drafted new contract clauses to reflect these changes, including transitional provisions for new employees starting between now and the date the new rules will come into force for your business. If you’re interested in implementing these options, please contact your consultant to discuss changes to your contracts or email us at hrdocuments@citation.co.uk.

 

Other changes

2. Incorporation of EU rules on the calculation of holiday pay and carry-over of holidays

The regulations also confirm certain principles from EU caselaw on the calculation of holiday pay and the circumstances in which holiday can be carried over and integrate them in UK legislation for the first time. As these principles were already followed by UK courts, this part of the regulations came into force on 1 January 2024.

Calculation of holiday pay

The 5.6 weeks statutory minimum holidays are comprised of two pots, the ‘EU’ four weeks’ holiday and the additional 1.6 weeks required under UK rules. Confusingly, the rules regarding the calculation of holiday pay generally are different for each pot, with holiday pay for the four weeks calculated on the basis of ‘normal pay’ (and therefore taking into account elements such as commission and regular overtime) whereas the remaining 1.6 weeks can be paid at basic pay, excluding those additional elements.

Last summer the government consulted on the prospect of having a single pot of 5.6 weeks holiday with a single set of rules. This was undoubtedly a very sensible idea, but it didn’t get off the ground as there was no consensus as to which set of rules would apply between the higher EU rate or the lower UK rate. The government therefore decided to keep the two-tier system of calculation of holiday pay, and this has now been set out in the regulations.

In relation to the four-week entitlement, the regulations restate the current European-derived caselaw principles of how holiday pay should be calculated – that the following payments should be included when calculating a week’s pay for holiday pay purposes:

(a) payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract;

(b) payments for professional or personal status relating to length of service, seniority or professional qualifications;

(c) other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks before the calculation date.

These payments don’t need to be included when calculating holiday pay for the remaining 1.6 weeks statutory entitlement. However, this should be specified in the contract and, if a business was changing its practice to only pay the higher rate for the four-week holiday period, it would need to consult with its employees.

Carry-over of holiday

The regulations restate the law in relation to the carry-over of statutory holiday entitlement in certain circumstances:

• Where a worker is unable to take their holiday because they’re on statutory leave (like maternity leave), they can carry over their full 5.6 weeks statutory entitlement.
• Where the worker is unable to take their holiday because they’re on sick leave, they can carry over their four-week EU entitlement (but the carried over holiday must be taken by the end of the period of 18 months from the end of the leave year in which the entitlement originally arose).
• Where an employer fails to either recognise the worker’s right to annual leave or provide payment for that leave or fails to tell a worker that any leave not taken in that holiday year will be lost, they can carry over their four-week entitlement. This can’t be carried forward beyond the end of the first full leave year after the employer has recognised and implemented the worker’s rights. Backdated holiday pay claims on this basis often arise employment status has been challenged and the individual is found to be not self-employed but either a worker or an employee. These claims can be particularly high risk as they’re not limited to the two-year backdated limit which applies where holiday has been underpaid.

 

3. End of the COVID carry-over rules

The regulations revoke the COVID carry-over rules and any leave carried over under those rules will have to be used up by 31 March 2024.

4. Changes to TUPE consultation rules

The regulations change the TUPE consultation rules to allow employers to consult directly with their employees (if there aren’t any existing representatives in place), where:

• The business has fewer than 50 employees (currently the exemption applies to businesses with fewer than 10 employees) or
• Where the transfer involves fewer than 10 employees (regardless of the size of the business).

The new rules will apply to TUPE transfers which take place on or after 1 July 2024.

 

5. Clarity on recordkeeping obligations

The regulations confirm that employers should keep records to satisfy the current requirements in the Working Time Regulations (to keep ‘adequate records’ to show compliance with the 48-hour working week limit and the rules regarding night workers) rather than the higher requirements set out in the 2019 CJEU case of Federación de Servicios de Comisiones Obreras (CCOO) v Deutsche Bank SAE (keeping records of all hours worked).

 

We’re here for you

If you’ve got any questions about how these regulations are likely to affect your business when they become law, tune in to our exclusive webinar led by our Director of Employment Law Gill McAteer on 17 January at 1pm. Click here to book your spot.

And as always, you can call our HR & Employment Law advice line 24/7 on 0345 844 4848.