Part 1: Calculation of holiday pay
The Government has announced changes to the calculation of holiday pay, due to come into force for England, Wales and Scotland on 1 January 2024 under the draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023
Annual Leave payments – Current situation
Almost all people classed as workers are legally entitled to 5.6 weeks’ paid holiday a year (known as statutory leave entitlement or annual leave) 5.6 X 5 days = 28 days of leave per year. This calculation applies even if an employee works more than 5 days per week.
The 5.6 weeks is made up of 4 weeks of leave derived from EU legislation and an additional 1.6 weeks entitlement stipulated in UK legislation.
Confusingly, the rules on holiday pay, for the EU derived 4 weeks of leave and the additional 1.6 weeks of UK derived leave are different.
For example, in terms of whether and when the holiday can be carried over into a subsequent leave year and what elements of remuneration must be included when calculating holiday pay. EU law generally requires workers to take their holiday in the holiday year in which it accrues and only allows unused holiday to be carried over in certain limited circumstances, whereas the Working Time Regulations 1998 allow the additional 1.6 weeks’ leave to be carried over if permitted by a relevant agreement, such as the employment contract. EU law requires workers to receive their normal remuneration when on holiday, including regular overtime, commission and certain allowances. However, UK law allows most workers to be paid the additional 1.6 weeks’ leave at basic pay only.
Amendments to current legislation
The government has decided in its latest legislation update, not to create a single annual leave entitlement of 5.6 weeks for all workers, but to maintain two separate ‘pots’ of holiday entitlement with separate rates of pay.
Workers will continue to receive 4 weeks of holiday at ‘normal’ pay (referred to as Annual Leave) and 1.6 weeks of holiday that can be paid at the basic salary (referred to as Additional Leave).
The Regulations define payments for the 4 weeks of Annual Leave as including:
- Payments, including commission payments, intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out;
- 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.
However, whether non-contractual commission, or discretionary bonuses should be included is not addressed in the Regulations, nor is the meaning of ‘regularly’ in relation to overtime payments.
Businesses that use the different rates for paying the 4 weeks annual leave and 1.6 weeks additional leave, will need to assess whether there is any potential historical liability for underpaid holiday.
This is because workers may argue that any UK holiday and any additional contractual leave ought also to have been paid at the higher rate, because “insofar as it is not practicable to distinguish between different types of leave” then it is now part of a composite whole.
Although the Supreme Court does not address how to distinguish between different types of leave and the order in which it is taken, it should be sufficient to explain this in contracts or policies.
In any event, an employee can only bring a backdated holiday pay claim within three months of the underpayment occurring. If there is a gap of more than three months between underpayments, the employee cannot claim for underpayments before that gap unless they can prove they are linked – for example, they have never received holiday pay for regular overtime. Any claims are still limited by the 2-year backstop in Great Britain, although claims in Northern Ireland will be able to stretch back further.
What should you do now?
Calculating holiday pay has always been complicated, and whilst the Regulations are welcome and provide some clarity, questions still remain. Whether the Government will have time to amend the draft Regulations to address some of these uncertainties before they come into force in January 2024 is unclear. In the meantime, we suggest taking the following steps to assess the impact on your business..
- Review your contracts, policies and procedures. Do they need amending to comply with the new rules? Are you capturing overtime, commission and allowance payments in at least 4 weeks of holiday pay? To head off carryover requests, ensure that you are reminding workers to use their holiday entitlement and that you are giving them enough opportunity to take it.