June’s Employment Law Digest – Beach Towels to Balance Sheets: Is Holiday Pay fixed in time for summer?

It has been around a decade since the European Court of Justice decided that the Working Time Regulations 1998 were incompatible with EU law, and that UK courts were therefore required to hold organisations to a higher standard than the WTR 1998 when it came to holiday pay (or at least some of it). The Government reacted swiftly by limiting unlawful deduction from wages claims to a two-year backpay period, but the WTR 1998 remained unchanged. Organisations and employment lawyers were left relying on drip-fed case law as to what should be included in holiday pay, for how many days and how far back claims could go. Whilst the barrage of historic claims which businesses feared didn’t materialise, it has still left organisations exposed as they grapple with the uncertainty in this area.

The 2022 case of Harpur Trust v Brazel put holiday pay back in the spotlight. All of a sudden, the law is supposedly clear that atypical workers (such as casual workers and term-time only staff in schools) could be in for a huge holiday pay windfall compared to regular hours workers. This finally prompted the Government to revisit the matter of reforming legislation around annual leave, which it has far more freedom to do post-Brexit. The government consultation made some practical although imperfect proposals, aimed to make life easier for businesses.

What has changed?

When it finally came to putting forward legislation, the Government went further than its proposal and seized the opportunity to reverse other areas of pesky EU case law on holiday pay such as the ban on rolled-up holiday pay. These changes come into effect for holiday years starting on or after 1 April 2024.

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So, cutting through the complex legal position regarding annual leave and holiday pay, what do organisations need to know in plain English?

• 12.07% is back. This is now the default method of calculating holiday entitlement for irregular and part-year workers (such as casual workers), reflecting the rate at which statutory annual leave is accrued (5.6 weeks’ holiday for 46.4 remaining weeks worked). Leave is calculated based on hours worked, rounded to the nearest hour. Many people will view this as a victory for common sense. In a crucial change, workers who are on sick leave or statutory family leave (such as maternity leave) will continue to accrue holiday during this period based on their average working hours in the 52 weeks prior to this period.
• Rolled-up holiday pay is back (if you want). In a move which really rolls back the years to 2006, employers can now choose to pay ‘rolled-up holiday pay’ to irregular and part-year workers. Many people would point towards the artificial distinction under the WTR 1998 between (i) the right to take holiday; and (ii) the right to be paid for holiday taken as the root of much of the uncertainty regarding holiday pay. This option simplifies the position by allowing employers to pay holiday pay as a 12.07% lump sum in each payslip in addition to basic pay.
• Other EU case law is here to stay. UK legislation has been updated to confirm the following principles from EU law:
• Statutory holiday can be carried over where the worker has been unable to take it in the relevant holiday year due to family leave such as maternity leave (where holiday can be carried over into the next leave year) or sickness absence (where holiday can be carried over for up to 18 months).
• Holiday pay for the first 4 weeks / 20 days’ holiday taken each year by workers with regular hours must take into account payments intrinsically linked to the performance of tasks which a worker is required to carry out under their contract (such as commission) and other payments which have been regularly paid (such as overtime). Employers should calculate this based on an average over the previous 52 weeks.

What should employers do?

The starting point for employers will be understanding what these changes mean for their organisation and deciding whether to utilise rolled-up holiday pay (if they have any irregular hours or part-year workers).

Payroll and HR systems will need to be updated to reflect any changes in practice. If rolled-up holiday pay is being used, payslips will need to clearly define this.

Employers may also need to update their contracts of employment, for example to reflect rolled-up holiday pay. More care needs to be taken when changing employment contracts for existing workers. For organisations with large casual workforces, there may be a requirement to consider collective consultation if there are 20+ such workers and they may not all be agreeable to the changes.

If you have any questions about updated guidance regarding Holiday Pay, or you have any other questions regarding employment law, please get in touch with Tom Shears, Or another of our Expert Employment Law Solicitors.