Happy holidays: changes to holiday pay rules
18 December 2023
There are a number of recent and forthcoming changes to the rules on holiday pay of which employers need to be aware. Here, we examine the Supreme Court’s landmark October 2023 judgment concerning historic underpayment claims in Chief Constable of the Police Force of Northern Ireland v Agnew [2023] UKSC 33. We also outline the Government’s legislative changes tabled for 2024.
Supreme Court overturns ‘3-month gap’ defence to underpaid holiday
In the recent case of Agnew, the Supreme Court delivered an important ruling that will make it easier for employees to claim against employers for historic underpayments of holiday pay (or other wages).
As many employers will know, the Employment Rights Act 1996 provides employees with a powerful mechanism for reclaiming underpaid statutory holiday, namely as an unlawful series of deductions from wages. The advantage to the employee is that, while the claim must generally be brought within three months of the most recent deduction, if they can establish that this formed part of a series, many historic underpayments may be brought within the scope of a single claim. Agnew, for example, concerned holiday payments from 1998 onwards. If a long series of underpayments can be established, as in this case, the potential financial liability of the employer may be sizeable.
In recent years, employers in mainland Britain (but not in Northern Ireland, where the Agnew case was brought) have been protected by a backstop of two years on a series (introduced by legislation in 2015) and by case law (the Bear Scotland case) which established that, if there was a gap of more than three months between any two deductions, the series would be broken.
However, in Agnew, the Supreme Court decided that the ‘three-month gap’ defence can no longer be relied upon. A gap of more than three months between deductions will not now prevent a ‘series’ from existing. Instead, in determining whether there is a ‘series’, a court will apply that word in its usual meaning (‘a number of things of a kind which follow each other in time’) and consider all the relevant circumstances, including but not limited to:
Any similarities or differences between the payments
The frequency, size, and impact of the underpayments
How the payments came to be made and applied
What links the payments together
Generally, to show that a number of payments constitute a series, an employee will need to identify a ‘unifying vice’ – essentially a common error leading to the underpayment, for example (as in Agnew), an unlawful method of calculating the holiday pay due. A lawful payment will not necessarily break a series of unlawful ones, since it is the ‘unifying vice’ which makes the payments a series, not the fact that they are all strictly adjacent in time.
The two-year statutory backstop on claims remains in place in England, Wales, and Scotland, which should provide some comfort for employers. It is possible, however, that this backstop might, in the future, be challenged in the courts.
Reform of holiday rights in 2024
Subject to parliamentary approval, the Draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 will come into force on 1 January 2024. These regulations roll together a number of Brexit-related changes which have been tabled in recent Government consultations.
Rolled-up holiday pay and the 12.07% method
For leave years starting from 1 April 2024, irregular-hours workers (such as casual workers and agency workers) and part-year workers will accrue holiday at 12.07% of hours actually worked. This is to address a perceived unfairness arising from the case of Harpur Trust, which confirmed that the current statutory method of calculating holiday will sometimes result in these types of workers being entitled, proportionally, to more holiday than those working full-time or regular hours. It will also become legal to pay these workers rolled-up holiday pay, i.e., to uplift their pay in each pay period by 12.07% regardless of whether any holiday is actually taken in that period. In some sectors, rolled-up holiday pay is already widespread in practice due to its convenience to the employer, and these changes will relieve many employers of non-compliance. Gradually, over time, potential liability for historic underpayment claims will also be eroded. The changes will diminish holiday entitlement for some workers, although for the majority, the loss is unlikely to be dramatic. Businesses with a holiday year starting on 1 January (or any date before 1 April) will only be able to implement these changes in 2025.Calculating average pay for holiday pay
The existing principles governing which payments are included in the calculation of a week’s holiday pay, which have their origins in UK and EU case law, will be codified in regulations from 1 January 2024. The first 4 weeks of holiday pay (but not the following 1.6 weeks) must include any payments intrinsically linked to the performance of contractual duties (such as commission), payments related to professional status (such as enhancements for length of service, seniority, or professional qualifications), and any overtime regularly worked over the preceding year. Irregular-hours and part-year workers (see point 1) must be paid holiday inclusive of the above payments throughout the year. The intention appears to be not to change the law, but simply to codify its existing principles, but, as with any change, it is possible the law will develop once the new provisions are interpreted by the courts.Carry-over
Similarly, the regulations will codify the case law governing when holiday can be carried over to the following year (which is generally prohibited). This can be done when a worker has been prevented from taking their holiday by maternity leave, other family-related leave, or sick leave, or where the employer fails to recognize the worker’s holiday rights or give them a reasonable opportunity to take their leave. Carry-over also applies where an employer has failed to inform the employee that their holiday allowance will extinguish at the end of the year if it is not taken; it is therefore important to include this provision in employment contracts and policies. In the case of family-related leave, all 5.6 weeks of statutory holiday can be carried over (in line with the Merino-Gomez case); in other cases, only 4 weeks can be carried. (However, irregular-hours and part-year workers can carry over their entire allowance.)Covid-19 carry-over
The rules introduced in 2020 to allow the carry-over of annual leave during the Covid-19 pandemic will be repealed on 1 January 2024. Any leave carried over under these rules must be used by 31 March 2024 and will otherwise be lost.
How we can help
For advice on the upcoming changes in holiday pay or on dealing with any unlawful deductions claims, please contact the team at Synchrony Law.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.