Simplifying holiday pay: Government changes to holiday pay and entitlement

Leave affected by COVID-19

Also, as of 1 January, workers can no longer accrue COVID carryover leave. This means that any leave that workers could not take because they were affected by coronavirus can no longer be carried over into the next 2 years.

Changes to the definition of a week’s pay for holiday pay

Employers will be aware that all full-year workers are legally entitled to 5.6 weeks of paid statutory holiday entitlement per year. The regulations provide that holiday pay for the first 4 weeks of statutory holiday pay (and all holiday pay paid to irregular hours and part-year workers) must be calculated based on a worker’s ‘normal’ rate of holiday pay. From 1 January 2024 the regulations confirm what the case law had previously set out, that the following payments must be included in these calculations:

- Payments including commission payments which are intrinsically linked to the performance of tasks which the worker is obliged to carry out under their contract;
- Payments for professional or personal status relating to length of service, seniority or professional qualifications; and
- Payments such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

The remaining 1.6 weeks’ entitlement can be paid at ‘basic’ rate of pay, being the worker’s basic remuneration.

Definition of an irregular hour worker and a part-year worker

The government has also introduced two new definitions for irregular hours workers and part-year workers, as follows:

Irregular hours worker - A worker whose number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable.

Part-year worker – A worker who under the terms of their contract, is required to work only part of that year and there are periods within that year (during the term of the contract) of at least a week which they are not required to work and for which they are not paid.

These definitions will be key for employers when identifying the workers that will fall under the new calculation method for statutory holiday entitlement.

A new method to calculate statutory holiday entitlement for irregular hours and part-year workers

The government has published guidance on calculating holiday leave entitlement for these defined workers. Additionally, employers can use a new method for calculating holiday entitlement for irregular-hours workers and part-year workers who are on sick leave or statutory leave.

Essentially, for leave years beginning on or after 1 April 2024, holiday entitlement for irregular-hours and part-year workers will be calculated in hours, not weeks. It will accrue at the rate of 12.07% of the hours worked in a pay period, this figure being based on the statutory minimum holiday entitlement (5.6 weeks).

For workers who are on sick leave or statutory leave, holiday entitlement will be calculated by reference to a 52-week reference period. This will allow employers to review and work out an average of hours worked across that period, to inform what period of leave should be deemed to have accrued during the period of absence.

Rolled-up holiday pay

Furthermore, for leave years beginning on or after 1 April 2024, employers will have the option to pay irregular-hours or part-year workers holiday pay that is rolled-up with their normal pay. This means that employers would be able to include an additional amount within every payslip to cover a worker’s holiday pay, instead of paying for holiday when a worker actually takes leave.

Employers will only be able to renumerate workers in this way if the rolled-up holiday pay:

- is paid an uplift of 12.07% of normal pay;
- is paid in the pay period when the holiday accrues; and
- is calculated by reference to total earnings during the pay period.

It is important for employers to note that implementing this method may disincentivise workers from taking holiday, and so it is important that employers still encourage workers to take their entitled annual leave when they can.

However, this is a really welcome and pragmatic way forward for employers of zero hours workers, as it can be very difficult to identify when such a worker is taking leave when they do not have normal contractual hours to take leave from.

Practical steps for employers

As a result of the above changes, it is vitally important that employers ensure that they accurately assess the status and working arrangements of all of their workers. Employers should review the definitions for irregular hour workers and part-year workers alongside their employees’ contracts to identify those that will fall under the new calculation method for statutory holiday.

Employers should also ensure that they have systems and documents in place that communicate to their employees their right to take holiday, encourage employees to access the same throughout the year and explain that holiday will be lost if not taken. This should not only be done to ensure that employers are compliant with the regulations, but to enable workers to rest, recover and ensure they are able to maintain performance levels.

Finally, the government guidance focuses on the legal minimum entitlement of 5.6 weeks’ paid holiday. However, employers may have workers on contracts entitling them to additional paid holiday beyond the statutory minimum. The new methods can be easily adjusted to provide this. If in doubt, legal advice should be sought.

Disclaimer - This information was correct at the time of publishing