New holiday pay guidance: do your contracts need updating?

26th January 2024

Holiday pay has been a cause of many headaches for employers over recent years, particularly in sectors where part-year workers are commonplace.

As a result of a number of decisions following legal claims, and a Government consultation about holiday pay (click here), new rules have been put in place, the aim of which are to help clarify; how holiday pay should be calculated in certain circumstances, whether rolled up holiday pay is lawful and what is included as “pay” for holiday pay purposes. On the back of this, the Government has produced some useful guidance about what these rule changes mean and how to deal with different scenarios. You can access this by clicking here.

For those that simply can’t face reading the raft of new legislation or the government guidance (which is a 39-page document when printed), our employment partner Annie Gray has summarised some of the key things to note:

Part-year and irregular hour workers

We now have a formal definition of a worker who works “part-year” or “irregular hours”.

Under the new Regulations (click here) a “part year” worker is defined as someone who is only contracted to work part of a leave year and there are periods (at least one full week) when they are not contracted to work, for this they are not paid. This will therefore include term time contracts in the education sector, and seasonal contracts in the hospitality industry.

An irregular hours worker is someone whose working hours and pay during each pay period is wholly or mostly variable. This will therefore usually cover casual workers including those working under zero hours contracts.

Where an employer has these kinds of workers, from the beginning of the leave year which commences after 1 April 2024 (so from 1 September 2024 for most schools), employers will be allowed to calculate holiday entitlement by using the old commonly used 12.07% of hours worked to calculate the amount of statutory holiday owed.

One aim of this legislation is to address the anomalies arising from the decision of the Supreme Court in Harper v Brazel (click here for the judgment) which effectively saw part-year workers being entitled to more holiday than full time employees in comparison with the amount of work done. However, it should be noted that this percentage for calculation of holiday is based on an assumption that the full-time equivalent holiday entitlement for the worker is the statutory minimum 28 days. If the worker is contractually entitled to more holiday, this figure will need to be adjusted. You will also need to ensure that, on a pro rata basis, part-time employees do not receive less holiday than full time employees.  Using the 12.07% is just an option though, employers are not obliged to use this calculation, providing it results in the correct amount of holiday being given and paid.

The situation with term time only workers in the education sector throws up some anomalies, see further reading here.

Rounding up/down of holiday pay

The new rules state that where the amount of annual leave accrued in a particular case includes a fraction of an hour, the fraction of the hour is to be treated as zero if it is less than 30 minutes, and one hour if the fraction equates to 30 minutes or more.

Rolled-up holiday pay

Previously outlawed holiday pay will be lawful (from the beginning of the employers’ leave year which commences after 1 April 2024) for workers who are defined as part-year, or irregular hours workers. For every hour they work, employers are therefore entitled to (but are not obliged to) pay workers an additional amount alongside their pay to reflect the holiday pay they have accrued. However, there are certain formalities that will need to be complied with if an employer elects to do this, including ensuring that the applicable terms are clearly set out in the worker’s contract and their pay slip must clearly identify which part of their pay is holiday pay in relation to each pay period.

In the education sector, it is typical for individuals who work part-year but fixed hours to have their annual pay paid in 12 equal monthly instalments and include a proportion of holiday pay. This practice can still continue but it is important that you adequately document how much holiday pay they are actually paid for each leave year. For further guidance for the education sector, click here.

It is important to note though, that the right to pay rolled up holiday pay does not mean that you can require workers to work 52 weeks. There is still an obligation to make sure they take the equivalent of 5.6 weeks’ leave during each leave year but it means that when they take this, no pay is owed as they will already have received their holiday pay entitlement.

Holiday leave carry over

The regulations allow all workers to carry over up to 4 weeks’ leave where:
1. An employer has refused to pay a worker their leave entitlement;
2. The worker has not had a reasonable opportunity to take their leave or been encouraged to take it;
3. The worker has not been told by their employer that if they don’t take all of their leave they will lose the right to take it; or
4. If the worker has wrongly been treated as self-employed and therefore hasn’t been given any leave.

It would therefore be worth ensuring that your contracts / holiday policies make it clear that, unless otherwise agreed, holiday not taken in the leave year within which it accrues will be lost. There will need to be an exception to the “use it or lose it” principle where someone is unable to take it because of illness or family related leave but other rules will likely apply in those circumstances.

Where workers are “deemed” to take leave in certain periods (such as school holidays) it is sensible to have your contracts state this fact and identify when these periods are to avoid any argument about whether such leave has in fact been taken.

Do your contracts of employment need to be changed to reflect the new rules?

It is a long-established requirement for workers/employees to be issued with a statement of particulars of employment (usually a contract of employment) which sets out the terms that apply in relation to their holiday. If the above changes mean that you will change how you calculate and pay holiday, and/or you wish to rely on the “use it or lose it” principle but this is not currently documented anywhere, you will likely need to change your contracts of employment.

Some caution should be taken about how you do this though as it may result in a fundamental change to terms and conditions which carries some risk. Depending on the number of affected workers, you may also need to embark on collective consultation.

For support and guidance about whether any changes are required and if so, how to go about doing this, please get in touch with our employment team who will be happy to help –

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