Reform of holiday rights: what employers need to know

Calculating holiday can be tricky for staff working irregular hours. To simplify things, the government has introduced changes to the rules on holiday rights.

“These changes were made following consultation, with the stated aim of simplifying the rules on holiday entitlement and pay,” says Sam Welham, an Associate Solicitor in the Employment Team at Barker Gotelee LLP. “They also address the potential unfairness of a Supreme Court Decision, that gave part year workers proportionately more holiday than someone who worked all year round.”

Sam Welham highlights the changes and the importance of complying with the new rules, as well as outlining how to take advantage of the benefits.

What are the new rules?

Many of the new regulations clarify existing requirements, although there are some significant new rules which 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 employer failed to ensure the worker had a reasonable opportunity to take it;
• the requirement to include payments such as overtime and commission in calculating holiday pay, although for some workers this does not apply to the full annual leave entitlement;
• new definitions of an ‘irregular hours worker’ and a ‘part-year worker’;
• 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’. This is an additional sum for holiday at 12.07% of normal pay and is paid instead of the worker taking holiday, or calculating average pay

Ensuring compliance 

While the changes do provide some clarity and simplify some areas, holiday rights remain complex.

Now is a good time to take stock and ensure you are compliant. For example, by determining which payments are included in holiday pay calculations, and over what period of time average pay is calculated. 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 pay to irregular hours and part-year workers is simpler than calculating holiday pay based on average pay over the previous 52 weeks.

How and when to take advantage of the new changes 

Employers who would like to adopt rolled-up holiday pay can only do so:

• where the worker meets the definition of an irregular hours worker, or a part-year worker. Some casual workers, zero-hours workers, agency workers, and hourly-paid term-time workers, are likely to fall within the definition. But, this will depend on the wording in their contracts, and the exact wording arrangements; and
• where the holiday year starts on or after 1 April 2024. This means for workers whose holiday year runs 1 January to 31 December, the changes for irregular hours and part-year workers only come into effect on 1 January 2025.

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 then decide whether you should pay rolled-up holiday pay;
• identify and introduce contractual changes to ensure compliance with the regulations;
• 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 workers to take their annual leave, and make it 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, whether overtime payments and allowances should be included in calculating holiday pay.

Another area of complexity is ‘carry forward’ of holiday to the next leave year.

To support you, we can:

• set down the detail in a clear and concise holiday policy;
• assess your additional payments to staff, such as commission and overtime and advise on which you need to include in calculating holiday pay and when;
• advise you on which workers come within the new definitions of irregular hours or part-year workers;
• check contract wording to ensure it is compliant;
• advise you on how to change employment contracts; and
• draft new contracts to maximise the chance that those workers and new workers come within the new definitions so you can pay rolled-up holiday pay.

For further information, please contact Sam Welham in the Employment Team on 01473 617348 or email [email protected]. Our employment solicitors are here to help.

The 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.