Last week the government announced proposals to simplify holiday pay and entitlement under UK law. John Hayes and Ben Payne look at what is set to change.
Amongst the many proposals contained within the Retained EU Law (Revocation and Reform) Bill and the government’s Retained EU employment law reforms consultation are significant changes to the current holiday legal framework.
The current legislation governing holiday entitlement and pay has become complex over time, particularly for atypical workers including those with irregular hours, working on zero-hours contracts, or with variable pay. This follows a number of controversial and unhelpful decisions by the European Court of Justice, some of which are counterintuitive in calculating holiday pay. As a result, the proposed changes by the government (which would be impossible but for Brexit) are welcome.
Employment law reforms
How are working time records changing?
The proposed reforms aim to simplify and clarify the current legal position on holiday entitlement and pay for all workers.
Single annual leave entitlement of 5.6 weeks
The first proposal involves creating a single annual leave entitlement of 5.6 weeks for all workers.
Currently, almost all workers are entitled to 5.6 weeks of paid annual leave each year, but this leave entitlement is made up of two parts set out in the Working Time Regulations 1998 (WTR). These are derived from the EU’s Working Time Directive and currently remain part of domestic employment law following Brexit.
The regulations can be summarised as follows:
- The right under regulation 13(1) of the WTR to a minimum of four weeks’ annual leave per year
- The domestic right to an additional 1.6 weeks’ annual leave (eight days for full-time employees) each year under regulation 13A of the WTR.
However, part of the issue under the current system is the distinction between the two sets of leave that has developed in various cases, as set out below:
Regulation 13(1) Leave (the first four weeks):
- When calculating holiday pay, this should include payments for guaranteed commission, bonuses and regular overtime
- It cannot be carried over, unless prevented by long-term sick leave, maternity, paternity or other parental leave.
Regulation 13A Leave (the remaining 1.6 weeks):
- This only needs to be paid at the basic rate and does not include commission, bonuses or overtime in the calculation unless agreed
- It can only be carried over if there is a written agreement between the employer and worker.
To add further confusion, the WTR does not specify whether regulation 13 or 13A leave should be used first in a leave year. This can often cause a dispute between employers and employees on pay and carry-over issues, particularly as the current system means the two types of leave are required to be paid at different rates.
Under the proposed system, the two leave entitlements would be combined into one entitlement of 5.6 weeks. Whilst this does not mean an increased leave entitlement for employees, the proposal will create a much simpler, single system to calculate holiday pay and rules on carry-over.
Whilst the consultation itself does not set out the proposal for calculating holiday pay, it is hoped this will be simplified, with the consultation stating that the government is “seeking views from employers and workers on how holiday pay is currently calculated and how they think it should be defined in legislation”. This follows on from the government consultation on calculating holiday pay for atypical workers following the recent Supreme Court case of Harpur Trust v Brazel.
Interestingly, the consultation indicates there will be similar provisions on carry-over, meaning there will still be protection for those on long-term sick or parental leave.
‘Rolled up’ holiday pay
Holiday pay
What Harpur Trust v Brazel means for holiday pay
Supreme Court: Holiday pay for part-year staff should not be pro-rated
Pimlico Plumbers holiday pay ruling: four steps for employers
The second major reform aims to address issues around holiday calculations for atypical workers by introducing ‘rolled-up’ holiday pay. This is a particularly big issue among agency workers.
Historically it was common for employers to pay ‘rolled-up holiday pay’ to those with atypical working hours. Based on annual leave entitlement of 5.6 weeks a year, an employer would typically calculate rolled-up holiday pay as an additional 12.07% on top of the hourly wage. As such, workers would receive an additional payment in respect of holiday pay each month, regardless of whether holiday had been taken.
However, this system has been held to defeat the objective of the Working Time Directive on the basis it could deter workers from taking their holiday. Therefore, rolled-up holiday is technically unlawful under the currently retained EU law, albeit the WTR were not amended to specifically prohibit the practice.
Under the proposed system, employers would be able to include an element of rolled-up holiday pay in an atypical worker’s wages, and the consultation refers to the previously used 12.07% calculation. This is likely to be a relief for many employers with agency staff, because the current legal framework (which requires employees to be paid based on the average of the previous 52 working weeks) leaves them in a position where employees are potentially entitled to a higher rate of holiday pay than their normal rate of pay.
This proposal would seem to also benefit employees and workers with atypical working hours, as it would ensure they receive a higher amount of pay for each pay period.
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The proposed changes to holiday pay and entitlement appear to be a step in the right direction for employers, and simplify the existing framework. However, certainty on this cannot be assured until further details are provided on the proposal for how pay will be calculated.
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