On 1 January 2024, the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 became law, bringing into force a number of amendments to the right to annual leave and the right to holiday pay under the Working Time Regulations 1998.
Further changes will become effective next week, on or after 1 April 2024, regarding holiday pay and entitlement to irregular hours and part-year workers.
Working Time Regulations 1998
Under the Working Time Regulations 1998 (WTR), workers are entitled to 5.6 weeks of annual leave per year. This annual leave entitlement is split into two “pots” ‒ regulation 13 leave which is four weeks as set out by the WTR and regulation 13A leave which is 1.6 weeks.
The distinction in the types of leave – regulation 13 leave versus regulation 13A leave ‒ has been an important distinction given different rules apply to each pot of leave when calculating holiday pay. It had been hoped that the amendments to the regulations would include replacing regulations 13 and 13A leave with a single composite pot of leave but this proposal has not been taken forward and the two distinct pots and associated rates of pay remain.
Whilst the objective of the regulations was stated as being to simplify annual leave and holiday pay calculations under the WTR, the reality is that this objective appears to have failed given concerns regarding a lack of clarity in the new calculations for annual leave and pay and the missed opportunity to create a composite pot of 5.6 weeks annual leave.
Changes Effective 1 January 2024
Carryover of annual leave
Workers can normally carry over a maximum of eight days into the next leave year, with the agreement of their employer. Where a worker gets more than 28 days’ leave, their employer may allow them to carry over any additional untaken leave but this is at the discretion of the employer.
From 1 January 2024, the following accrued annual leave can be carried over:
- Family related leave: Under the new regulations 13(14) and 13A(7A) WTR, where any worker is unable to take some or all of their statutory holiday entitlement as a result of taking a period of maternity or other family related leave, they will be entitled to carry forward up to 28 days of their untaken leave (both the four weeks’ leave derived from regulation 13 WTR and the additional 1.6 weeks under regulation 13A WTR) into the following leave year.
- It should be noted that the regulations do not state that the leave carried over must then be taken in the following year. Nor do the new regulations prescribe any timeframe in which the carried over leave must be taken so the employer must consider a consistent approach when setting out when this accrued leave will be taken.
- Sickness: With regard to unused statutory holiday accrued during a period of sickness, the position is slightly different. Under new regulation 13(15) WTR, where a worker working regular hours all year round is unable to take some or all of their statutory holiday entitlement as a result of being off sick, then the worker will be entitled to carry forward up to 20 days (the four weeks’ leave derived from regulation 13 WTR but not the additional 1.6 weeks under regulation 13A WTR) of their untaken leave into the following leave year. However the carried over leave must be taken by the end of the period of 18 months starting from the end of the leave year in which it was accrued. These 20 days should be paid at the “normal” rate.
- Employer failure: Where an employer has:
-Refused to pay a worker their paid annual leave entitlement;
-Failed to give the worker a reasonable opportunity to take their leave ‒ and encouraged the worker to do so; or
-Failed to warn the worker of the risks of losing untaken leave at the end of the holiday year;
-Then the worker will be entitled to carry forward up to 20 days (the four weeks’ leave derived from regulation 13 WTR but not the additional 1.6 weeks under regulation 13A WTR) of their untaken leave into the following leave year.
The difficulty with the continuation of the distinction between the two pots of leave ‒ four weeks’ regulation 13 leave and the additional 1.6 weeks’ regulation 13A leave ‒ is that there remains the question for employers to determine which leave a worker has used up when determining which leave to carry over, which will continue to be problematic for employers.
Repeal of COVID-19 Leave Carryover
During the pandemic, the WTR was amended to enable workers to carry over up to four weeks of annual leave into the following two years, where it had not been reasonably practicable for them to take annual leave because of the effects of COVID-19. These carryover rules have been repealed such that workers are no longer able to accrue COVID-19 carryover leave. Any workers who may have remaining Covid carryover leave must use it by 31 March 2024.
Normal Remuneration
Normal remuneration for the four weeks’ regulation 13 leave was developed through case law which established that commission, overtime and performance-related bonuses should be included in holiday pay calculations. Following Brexit, this case law no longer holds the same authority, so the new regulations have sought to set out what will now be included for a week’s pay.
Under regulation 16(3ZA)WTR, a week’s pay for the purposes of holiday pay for the four weeks’ regulation 13 leave should include:
- Payments, including commission payments, intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out;
- Payments relating to professional or personal status relating to length of service, seniority or professional qualifications; and/or
- Other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.
This guidance would appear to cover the elements of pay established by case law, i.e. bonuses and commission payments, but may arguably also cover payments such as car allowances, so there remains an element of uncertainty for employers when considering the components of pay to be included.
It should also be noted that the provision regarding overtime payments does not expressly include voluntary overtime payments but this omission may be covered if any overtime payment is “regularly paid” to the worker.
Changes Effective 1 April 2024
There are further changes to annual leave in effect from 1 April 2024.
The new regulations define two new categories of worker – “irregular hours workers” and “part-year workers” ‒ who will be covered by the WTR.
The new categories are defined in new regulation 15F WTR 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 the contract in that year is, under the contract terms, “wholly or mostly variable”– for example zero hours workers.
- 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 in a given leave year, in periods of at least a week in which they are not required to work and they are not paid – for example term-time workers.
For holiday years from 1 April 2024, annual leave entitlement for irregular hours workers and part-year workers will be assessed under calculations set out under regulations 15B-15F, which in a reversal of Harpur Trust v Brazel [2022] UKSC21 brings back the use of the 12.07% calculation.
For irregular hours and part-year workers, annual leave will be calculated as if there is one composite pot of leave (5.6 weeks). The annual leave will accrue throughout the year and will be calculated on the last day of a pay period as 12.07% of the hours worked in that pay period. So if a worker is paid on the last day of the month the annual leave entitlement will be calculated as 12.07% of the hours worked in that month.
At the point of taking annual leave, these workers can take up to the amount that has been accrued in that year, plus any that has been carried over less any leave that has already been taken.
A potential problem with the 12.07% calculation is that the holiday entitlement is measured in hours but the regulations do not define how many hours make up a day’s annual leave, which is problematic both for establishing how many hours a worker has to accrue for a day off and for calculating the maximum statutory entitlement (28 days/5.6 weeks).
With regard to pay, for leave years beginning on or after 1 April 2024, employers can choose to use rolled-up holiday pay or continue to pay workers when the leave is taken. It will be for the employer to decide the method of payment.
Employers using rolled-up holiday pay should:
- Calculate it based on a worker’s total pay in a pay period;
- Inform the workers that they intend to start using rolled-up holiday pay (and check if this will entail a variation of the workers’ contract); and
- Ensure holiday pay is paid at the same time as the worker is paid for the work done in each pay period and that this payment is clearly marked as a separate item on the pay slip.
An employer must still allow a worker to take their holiday but they will not be paid at the time they take it.
Where a worker is paid rolled up holiday pay, a 52-week average will be calculated to determine how much holiday should be paid for any period of sick leave or statutory leave.
The government has sought to provide some guidance on the new legislation on holiday pay and entitlement reforms with its Holiday pay and entitlement reforms from 1 January 2024. The fact remains, however, that even with the government guidance there is still some ambiguity and complexity in the new regulations which will only be determined with either further judicial guidance or litigation to establish case law. Either which way, it’s certainly no holiday for employment advisers!