The issue of holiday pay is a regular topic in the employment spotlight and is an issue we regularly advise members on via the FSB Legal advice line. Unfortunately, it has long been a topic of some complexity and uncertainty for employers.
In November’s FSB bulletin articles, we summarised a recent ruling which meant that The Police Service of Northern Ireland (PSNI) could face a £40m bill after losing an appeal at the Supreme Court in a long-running case on holiday pay. As this was a Supreme Court ruling, the principles apply across the UK. There has long been a need to simply the calculation of holiday entitlement and pay through legislation to provide greater certainty for employers who employ workers whose pay varies due to additional pay elements such as overtime and commission.
Annual leave clarification
To that effect, draft legislation is likely to come into force in Great Britain in January 2024 and will affect the calculation of holiday pay for certain types of workers for pay periods from April 2024. Different legislation applies in Northern Ireland. The new legislation brings the following existing caselaw principles into legislation in Great Britain, including:
- The current right to carry over statutory annual leave where an employee has been unable to take it due to being on maternity or other family related leave or sick leave. Workers on sick leave are able to carry over annual leave for a maximum of 18 months where a worker is unable to take their leave due to sickness;
- The current right to carry over statutory annual leave where the employer has failed to inform the worker of their right to paid annual leave or enabled them to take it; and
- The rate of pay for annual leave accrued under regulation 13 of the Working Time Regulations, which is the basic four weeks’ leave entitlement in any leave year.
The legislation will also revoke the Working Time (Coronavirus) (Amendment) Regulations 2020, whereby workers are entitled to carry over up to four weeks’ annual leave to the next leave year if they cannot take it for a reason related to the coronavirus pandemic, as these regulations are no longer necessary. Workers will have until the end of March 2024 to use up any outstanding annual leave which has been carried over for this reason.
What is normal pay?
For the first time, what amounts to ‘normal pay’ for holiday pay purposes (which includes the additional pay elements they may normally receive when working) is defined in legislation for the basic four week leave entitlement. This will hopefully create greater certainty for employers when calculating holiday pay for staff that don’t receive a fixed salary or wages, for example due to working regular overtime or receiving commission payments.
What is the new method for calculating holiday entitlement for atypical workers?
The new method for calculating holiday entitlement that is likely to apply from April 2024 only applies to irregular hour workers (such as zero hours workers, or those who work overtime) and ‘part-year’ workers.
This does not affect how holiday entitlement should be calculated for regular hours workers.
Currently, determining an irregular hours or irregular pay worker’s holiday pay entitlement can only be done retrospectively, by looking at average pay received during paid periods in the previous 52 weeks. There is no legally compliant way of calculating statutory holiday entitlement for these workers on a rolling basis as the hours are worked.
The new legislation provides that those that work irregular hours or who are part-year workers will accrue statutory holiday for each pay period (e.g., each week if they are weekly paid workers, or each month if they are monthly paid workers) at the rate of 12.07% of the number of hours that they have worked during that pay period.
Linking leave entitlements directly to hours worked will also remove some of the practical difficulties and current perceived unfairness for “part-year” workers who are currently entitled to receive a higher proportion of holiday compared to workers who work all year round. Currently, the Supreme Court ruling in Harpur Trust v Brazel in July 2022 means that workers who remain under contract but who work only during certain periods such as term time only (predominantly teachers, but also some zero-hour workers) are still entitled to accrue statutory holiday during school holidays or other ‘down time’.
Rolled up holiday pay
The legislation will also permit rolled up holiday pay, which is currently unlawful. This change will permit employers to include in the payment of wages a separate pot of payment for holiday pay, regardless of whether the worker actually takes their annual leave entitlement.
Other changes
The new legislation will also:
- Remove the additional working time record keeping requirements which require employers to keep records specifically of working hours and rest to evidence compliance.
- Permit small businesses (with fewer than 50 employees) carrying out TUPE transfers of any size, and businesses of any size undertaking a small transfer (of fewer than 10 employees) to consult their employees directly regarding a TUPE transfer if there are no existing representatives in place.
How can members stay up to date with these changes?
FSB members can prepare for this change by keeping an eye on updates to our ‘holidays’ fact sheet on the hub. Our template zero hours contract of employment and accompanying guidance notes on the hub will be updated ahead of the new legislation on statutory annual leave which is likely to apply from April 2024. Employers will need to ensure that any software or manual method used for calculating holiday pay is updated by this date to comply with this change.