Reform of holiday rights: what employers need to know

13 August 2024

The existing rules around holiday pay for workers with irregular working patterns (such as term-time workers, or zero-hours workers on flexible shift patterns) are not necessarily intuitive and sometimes produce surprising results for employers. This was demonstrated in the prominent case of Harpur Trust v Brazel, a 2022 Supreme Court decision that gave a term-time worker more holiday than someone who split the same number of working hours across a whole year.

This year, the Government has introduced changes to these rules in a series of reforms to EU-derived employment rights. These changes were made, after consultation, with the stated aim of simplifying the rules on holiday entitlement and pay. They also address the perceived unfairness of Harpur Trust v Brazel.

In this article, we explain the changes, the implications for compliance, and some possible benefits for employers.

What are the new rules?

Many of the new regulations clarify existing requirements, although there are some significant new rules.

Employers need to be aware of:

  • the right to carry over holiday into the next holiday year when it has not been possible to take it due to sickness or family-friendly leave, when the worker was denied the right to take leave, or the worker was not told that they would lose their holiday if they did not take it before the end of the holiday year;

  • the requirement to include payments such as commission and regular overtime in the calculation of holiday pay (but for workers with regular hours, this only applies to the first four weeks of the statutory holiday entitlement unless the contract provides more favourable terms to the worker);

  • new definitions of an ‘irregular hours worker’ and a ‘part-year worker’;

  • a new requirement to accrue holiday entitlement in whole hours for irregular-hours and part-year workers at 12.07% of actual hours worked in a pay period;

  • a new mandatory method for calculating holiday entitlement for irregular hours and part-year workers while off sick or on family-friendly leave; and

  • a new option to pay irregular-hours and part-year workers ‘rolled-up holiday pay’: an additional sum for holiday at 12.07% of their payslip (instead of calculating a holiday payment to be made to the worker when they actually take leave).

Ensuring compliance

While the changes provide more clarity and ease of compliance in some areas, holiday rights remain complex. Now is a good time to ensure that you are compliant, for example by determining which payments are included in holiday pay calculations and over what period of time the average is worked out. A worker can bring an employment tribunal claim for past shortfalls in holiday pay.

Advantages of the new rules

The option to pay rolled-up holiday to irregular-hours and part-year workers is simpler than calculating holiday on average pay over the previous 52 weeks.

Given the administrative complexities of alternative methods, many employers had continued to use rolled-up holiday pay for casual and zero-hours workers even though it had been declared unlawful in 2006. Where employers are able to use the new rules, this will remove the possibility of being challenged for paying rolled-up holiday.

How to take advantage of the new changes

Employers wishing to adopt the rolled-up holiday pay option can only do so:

  • where the worker meets the definition of irregular-hours worker or part-year worker. Some casual workers, zero-hours workers, agency workers, and hourly-paid term-time workers are likely to fall within the definitions – but this will depend on the wording in their contracts and the exact working arrangements; and

  • in relation to holiday years starting on or after 1 April 2024. This means for workers whose holiday year runs 1 January to 31 December, the changes only come into effect on 1 January 2025.

Now is a good time to assess whether you can and wish to use the new rules. Remember that this may involve changes to contracts, which usually requires the worker’s agreement.

Practical steps for employers

It is important to:

  • check policies, contracts, and practices to ensure that they are compliant;

  • identify any workers who are likely to fall within the definitions of irregular-hours or part-year workers and decide whether you wish to pay rolled-up holiday;

  • identify and introduce any contractual changes that need to be made;

  • adjust payroll systems to process the accrual of holiday in hours for irregular-hours and part-year workers;

  • ensure payslips itemise the element of rolled-up holiday pay; and

  • set up systems to remind employees to take their annual leave and make clear that they must ‘use it or lose it’.

How we can help

While the changes go some way to simplifying the rules on holiday entitlement and pay, they also bring in differences between the rules that apply to irregular-hours and part-year workers and those that apply to other workers, for example on the inclusion of overtime payments and allowances. Another area of complexity is ‘carry forward’: there are variations in the amount of holiday that can be carried forward and for how long, depending on the circumstances.

To support you, we can:

  • set down the detail in clear and concise holiday policies;

  • assess your additional payments to staff, such as commission and overtime, and advise on which you need to include in calculating holiday pay;

  • advise you on which workers come within the new definitions of irregular-hours or part-year workers;

  • check contract wordings to ensure they are compliant;

  • advise you on implementing contractual changes; and

  • draft contracts to ensure workers come within the scope of rolled-up holiday pay.

For further information, 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.

Chris Tutton