The question of how to pay holiday pay to workers working irregular hours has for many years been a vexed one. Rolling up holiday pay has technically been unlawful (although as a matter of pragmatism it has remained a wide-spread practice). In 2022 the Supreme Court in Harpur Trust v Brazel cast doubt on the usual calculation method of 12.07% of hourly pay, and ruled that workers working a part year but employed year round could not have their holiday pay calculation pro-rated to the actual weeks worked. This has led to unexpected liabilities and significant confusion for employers who engage a variety of workers with atypical working patterns.

Following a period of public consultation, the Government has legislated to regularise the position, and the new legislation comes into effect for leave years beginning on or after 1 April 2024 (The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023).

Essentially, the new legislation confirms that holiday pay should be calculated on the basis of 12.07% for part year and irregular workers, and expressly permits rolling up holiday pay for such workers. We set out below the key practical points of which employers need to be aware when considering their holiday pay arrangements in light of these changes.

Which workers are covered by the new legislation?

The new legislation applies to a worker who either:

  • works and is paid for hours in each period for which they are paid (eg weekly/monthly) which, under the terms of their contract, are wholly or most variable (an irregular hours worker); or
  • is contractually required to work for only part of a leave year and has periods of at least a week when they are under contract when they are not required to work and for which they are not paid (a part year worker)

The italicised wording in respect of a part year worker is significant. Many term time only employees are paid based on the actual weeks that they work, but they receive their pay split equally over 12 months. This would take them outside of the scope of the new legislation, and they would still need to be treated in accordance with the principles in Harpur Trust v Brazel.

How should holiday pay be calculated for these workers?

The 12.07% calculation method.

The new legislation specifically states that 12.07% of the number of hours worked in any pay period is the correct calculation method, capped at a maximum of 28 days per year accrual. (There are particular rules for calculation of accrual during sick leave and family leave – see further below).

This is only the correct calculation where the annual leave entitlement of the worker is statutory only. If a worker had a higher contractual entitlement to annual leave (which might, for instance, be the case if the employer had mirrored more generous holiday terms of other staff for all workers), this figure would need to be recalculated.

Can holiday pay now be rolled up?

Yes.

A 12.07% uplift for holiday pay can now lawfully be applied to the pay of irregular hours workers and part year workers at the same time as they receive their normal pay. It should be noted however that this does not apply to all workers where employers might wish to roll up holiday pay. A seasonal worker who was employed to work for 4 months only, for instance, would not be in scope. (They could, of course, be paid their holiday pay in one lump sum on termination of their employment under the Working Time Regulations 1998.)

It will be essential that holiday pay is separately itemised on the pay slip of any worker who is being paid on a rolled up basis, and this is expressly stated in the new legislation. For employers who are not currently rolling up holiday pay for workers but who wish to move to this payment mechanism there will also be likely to be contractual issues to consider. Holiday pay will obviously need to be a genuine addition to the agreed contractual hourly rate. Different contractual arrangements for the timing of payment of holiday (eg that holiday will be paid when taken) will need to be expressly varied.

What happens about accrual of annual leave during periods of sickness absence or family leave?

The employer needs to calculate the average number of hours per week that the worker worked during the “relevant period” before they started sick leave or family leave. The “relevant period” is:

  • the 52 weeks ending with the day before the day on which the sick/family leave commenced; or
  • if the worker has been engaged for less than 52 weeks at the point of calculation, the period of their engagement.

Any week in which the worker has previously been on sick leave or family leave should be discounted for these purposes, but other weeks of no work are still to be included in the averaging calculation.

 If weeks are discounted because of sick or family leave then the employer should look back to previous weeks, up to a long-stop of 104 weeks. Again, there is an annual cap on accrual of annual leave of 28 days.

The average number of hours should then be multiplied by 12.07% to give a weekly figure for hours of annual leave during sick or family leave.

Does the new law affect leave being carried forward from one year to the next?

The new legislation deals with three scenarios in which annual leave needs to be permitted to be carried forward by all workers:

  • Where the worker is unable to take annual leave due to absence on sickness leave. In this case for most workers, up to 4 weeks leave (only) can be carried forward for up to 18 months from the end of the holiday year in which the leave accrued. For irregular hours and part year workers it appears that the amount of leave that could be carried forward could be greater (up to 28 days) as the amount of annual leave accrued when sick needs to be calculated as set out above.
  • Where the worker is unable to take annual leave due to family leave. In this case all 5.6 weeks can be carried forward but only for 12 months from the end of the holiday year in which the leave accrued.
  • Where the worker did not take (or get paid for) annual leave due to the employer’s actions in (i) denying the entitlement to annual leave (eg denying worker status); or (ii) not giving the worker the opportunity or encouragement to take annual leave; or (iii) not warning the worker that they will lose their annual leave if they do not take it by the end of the leave year. In this case all 5.6 weeks can be carried forward until the end of the first full leave year in which the employer is no longer at fault.

It should also be noted that 31 March 2024 was the long-stop date for leave carried forward under the special measures during Covid to be taken by all workers.

The new legislation will make the administration of holiday pay much easier for the employers of many atypical workers from 1 April 2024, and it is a welcome development. There are, however, a number of limitations to its applicability, and employers will need to pay close attention to the detail to ensure that they remain within the letter of the new law.

If you’d like to discuss any points raised in this article, please do get in touch.

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The material in this article is provided for guidance and general information only and is not intended to constitute legal or other professional advice upon which you should rely. In particular, the information should not be used as a substitute for a full and proper consultation with a suitably qualified professional. Please do contact the Bates Wells team if you require further information.