The government has announced draft legislation to reform holiday pay for part-time and irregular hours workers, which will come into effect from January 2024.
As well as simplifying calculations, the Department for Business and Trade said it will allow ‘rolled up’ holiday pay for part-time workers and those who work irregular hours, enabling employers to include an amount for holiday pay on top of the hourly rate in regular pay packets.
The announcement follows a series of consultations into existing EU employment law and holiday pay. “The reforms we are taking forward following both consultations will help to simplify and address concerns about the calculation of holiday entitlement for employers and make entitlement clearer for all irregular hours workers, including part-year workers and agency workers,” the government said.
But what do they mean for employers and employees?
Holiday pay for irregular hours and part-year workers
The draft legislation announces a new method of holiday accrual for part-time and irregular hours workers.
This follows confusion that arose from the Supreme Court’s decision in the Harpur Trust v Brazel case last year. The case resulted in part-year workers receiving more holiday entitlement than part-time workers who worked the same number of hours on an annual basis.
However, the new legislation will calculate holiday pay entitlement for such workers as 12.07 per cent of the hours worked in a pay period, in a bid to level the playing field and create greater transparency.
Rolled-up holiday pay will be allowed – but only for some workers
Rolled-up holiday pay is where employers pay workers a sum in addition to their normal hourly rate of pay to represent their holiday pay entitlement. However, it was made unlawful following a 2006 European Court of Justice ruling, as a result of concerns workers may not be incentivised to take leave as they could earn more holiday pay by staying at work.
Rolled-up holiday pay will now be allowed, but only for part-time workers, irregular hours workers and some agency workers.
However, in the government’s consultation, 436 respondents (45 per cent) said they did not support rolled-up holiday pay, as they suggested it could lead to missed leave or reduced pay.
Recognising that rolled-up pay has had a “mixed response”, the consultation noted that rolled-over pay would not be allowed for full-time members of staff, but said there were “still clear benefits” to business and workers in introducing the system for part-time workers and those with irregular hours.
“The government recognises the concerns raised with using rolled-up holiday pay, especially that it may disincentive workers from taking leave. However, we consider the existing safeguards proportionate in addressing these concerns,” it said.
The reforms will also see changes to Transfer of Undertakings Protection of Employment (TUPE) rights, which protect employees and their benefits when their organisation transfers from one employer to another.
The reforms will allow small businesses to consult their new employees directly if there are no existing worker representatives in place. Where employee representatives – including trade unions – are in place, employers will be required to consult them.
The reforms have largely been welcomed. Dave Chaplin, CEO of contracting authority ContractorCalculator, says: “These reforms are most welcome and will provide much-needed clarity and fairness around holiday pay for contractors, especially those working through umbrella companies. Let’s hope we will now have a fairer and transparent system for all and that we see less holiday pay skimming by unscrupulous operators in the market.”
Neil Carberry, chief executive of the Recruitment & Employment Confederation, “strongly supported” the reforms, saying they reflect that the “[UK’s] labour market relies on people who choose to work in different ways”.
“Making sure employers can easily comply with the law and workers get their holiday pay is important – and these changes deliver that,” he says.
Carberry points out that there are more than four million workers who have irregular, non-repeating working patterns. “That needs to be recognised by enacting further reform of the Working Time Regulations so they better reflect modern ways of working,” he says. “The law must enable different forms of contracts, not hammer them into one form.”
Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance, says that, while holiday pay and whether it is rolled up or accrued has brought some confusion, “for me, it has always been about transparency so that workers understand their entitlement to holiday pay and how to ensure they are receiving the correct amount”.
He says the Harpur Trust v Brazel case highlights “a number of anomalies” in holiday pay legislation, adding: “Let's hope that the new legislation will ensure that workers are now treated fairly and will benefit from a transparent and compliant process to receiving the holiday pay that is due to them and that many of the reported issues on providers withholding holiday pay will become a thing of the past."
Tania Bowers, global public policy director at APSCo, says rolled-up holiday pay is “necessary” and will protect agency and umbrella workers.
She says the plans are “the only fair way to pay irregular workers and ensure they are no longer at risk of losing accrued holiday pay because of the way they are employed”.
However, she adds, “it is now important for recruiters and umbrella companies to assert to workers and end clients that individuals must take the holiday or pay they are owed”.