Holiday entitlements – where are we now?

We thought it would be helpful to wrap up the year with a summary of the current position on employee holidays.

Thankfully our task has been made easier by the government's revisions to the Working Time Regulations (WTR) which address head-on, the confusion caused by recent cases such as Harper Trust: Harper #1 and Harper #2.

Effective from the 1 January 2024, the WTR will usher in the following changes

Two pots of holiday entitlement to remain

The WTR provides for 5.6 weeks of holiday entitlement per year, however this is split between the four weeks derived from the EU Working Time Directive (referred to as Regulation 13 leave) and an additional 1.6 weeks of holiday granted by the UK government (referred to as Regulation 13A leave).

The EU holiday (Regulation 13) must be paid at the employee’s ‘normal’ rate of pay which includes commissions, allowances and overtime etc. Whereas the remaining 1.6 weeks of holiday (Regulation 13A), is paid at basic rate of pay only.

Initially, it was proposed that there would only be one pot of 5.6 weeks leave and views were sought on what rate of pay would be applied, either ‘normal’ pay or just basic pay. Given that both pay types had gathered strong support perhaps it’s not surprising that the government decided to keep the status quo and maintain the two-potted approach.

The WTR has however been updated to provide additional clarity on what should be factored in determining the rate of normal pay for the first four weeks of holiday, namely:

• payments, including commission payments, which are intrinsically linked to the performance of tasks which the worker is obliged to carry out under the terms of their contract
• payments for professional or personal status relating to length of service, seniority or professional qualifications
• other payments, such as overtime payments, which have been regularly paid to the worker in the last 52 weeks.

Its open to an employer whether they apply the same approach to the remaining 1.6 weeks of the holiday. Many employers elect to do so to avoid operating two methods of calculation and tracking. This situation is not helped by the Supreme Court’s comment in the recent Agnew case in which it concluded that different types of leave are not necessarily taken in sequence. For any employer that aims to distinguish between the two when calculating the rate of holiday pay we would recommend clear wording is included in employment contracts that spells out the sequence in which the two pots of holiday are taken.

For employers that have continued to calculate all holiday pay on basic salary only in the hope that the EU rules would be scrapped its clear now that after a number of false dawns ‘normal’ pay is here to stay. Immediate action is recommended to ensure that the correct rate of pay is applied moving forward. Claims for wrongly paid holiday must be made within three months of the last underpayment and can stretch back two years. Following the recent case of Agnew, there is now a heightened risk that a claim will extend back the full two years. Previously it was held that a series of underpayments would be broken by a gap of three months and therefore a three month period during which an employee hadn’t taken holiday could act as a circuit breaker extinguishing prior liabilities. However the court in Agnew determined that a series of underpayments is not necessarily broken by a period of three months between the underpayments and other factors need to be taken into account. So in summary following Agnew the employee must still make a claim within three months of the last underpayment however if they do so then it is likely the claim would cover the last two years of underpayments. It is therefore still the case that an employer who starts and pays at the correct rate will have their liability extinguished if the employee does not claim within three months of the last wrongly calculated payment. Surely an incentive to put things right!

Carry over rights

The revised WTR will incorporate rights that currently flow from EU caselaw and will therefore include provisions that allow carryover of holiday into a new holiday year when an employee is prevented from taking it because they were absent due to sick leave or family leave.

The revisions will also permit carryover in circumstances where an employer has failed to provide an employee with reasonable opportunity to take it or failed to warn them of the risks of losing it before the end of the year. Again, this codifies current caselaw and makes end of year ‘use it or lose it’ prompts an absolute must for all employers.

Carry over will also be permitted in circumstances where an employer did not recognise the individual’s right to paid holiday, such as where they are wrongly classified as self-employed. Because the entitlement rolls forward indefinitely it is not seen as a retroactive claim and therefore unlike the two-year backstop applied to holiday pay claims, there is no limit to how many years of entitlement can be claimed. Organisations therefore should ensure they apply robust tests to assess the true status of their self-employed contractors.

Irregular hours and part-year workers

To the relief of many employers the revised WTR will include provisions aimed squarely at addressing the flaws laid bare in the Harper Trust v Brazel case in which it was held part year workers on permanent contracts were entitled to a full year's holiday entitlement, regardless of the number of weeks worked.

For holiday years from 1 April 2024 individuals who work irregular hours or part-year (such as term time or casual workers) will accrue holiday on the last day of each pay period at a rate of 12.07% of the number of hours worked during the pay period. This will ensure that their entitlement will remain in proportion to the hours that have been worked and differs from other employees who receive their full entitlement at the start of a holiday year. It is open to employers to allow the employee to take more holiday than they have accrued. In such cases its essential that employment contracts reserve the right for the employer to deduct over usage from final salaries.

For the same group of workers the revised WTR sees a welcome return of rolled-up holiday pay. Rolled-up holiday pay is where the accrual in a pay period is paid to the employee with their basic salary rather than when they actually take their holiday. The practice was outlawed because in the opinion of the European Court of Justice it discouraged workers from taking time off. However, for many casual work arrangements rolled up holiday pay is the only logical approach and many employers have continued to apply it.

From 1 April 2024 rolled up holiday pay will be permitted on condition that:

• the individual is a part-year or irregular hours worker
• the holiday pay is calculated using 12.07% of all pay for work done
• the holiday pay (12.07%) is paid at the same time as the pay for work done
• the holiday pay is separately itemised on the payslip.

It’s worth noting that the 12.07% formula does not account for the different holiday pots that we covered at the start of this article and therefore in some cases it could result in higher rates of holiday pay.

It is also the case that an employer has a legal duty to ensure that an individual takes their 5.6 weeks of holiday per year and this duty applies even when they are paid using rolled-up holiday pay and not when they actually take their holiday – which could make it difficult to monitor.

Record keeping

Following a 2019 decision by the European Court of Justice employers have been required to record the daily hours worked by their employees.

Under the revised WTR employers will be required to keep records that evidence compliance with the 48 hour week, opt-out agreements, length of night work and health assessments for night workers, and therefore an employer is not required to record daily hours if they can evidence compliance by other means.

Key takeaways

The revisions to the WTR should be welcome news for most employers, although in some areas they lack detail, such as a lack of definition around normal earnings for the calculation of holiday pay.

Employers of irregular and part year workers will be eager to adapt their processes to accommodate ‘accrue as you go’ and rolled up holiday pay.

For some employers it will be the much-needed spur to start and correctly calculate holiday pay and for others a need to evaluate the true status of their self-employed contractors.

However, for almost all employers there will be a need to look at policies and procedures to ensure that they align with the new rules on holiday carry over and ensure that ‘use it or lose it’ prompts are timetabled before the end of the holiday year.