People - Government's 2023 consultation on holiday and pay

Holiday Carryover

In instances where an employee has been on either family or sick leave, thereby unable to utilize their annual leave, provisions are in place to facilitate the carryover of accrued leave. The recent legislative updates aim to delineate the applicable regulations for employers in Great Britain, accompanied by a few amendments to the existing rules. The key modifications are outlined below:

1. Employees will have the option to carry forward their entire 5.6-week entitlement into the subsequent holiday year if they couldn't utilize it due to family leave.
2. Regarding sick leave, employees will be allowed to carry forward only their four weeks' entitlement if their inability to take leave is due to sickness. This accrued leave must be utilized within 18 months following the end of the holiday year in which the entitlement first arose. This provision aims to prevent the accumulation of significant amounts of annual leave during long-term sick leave, which often leads to substantial payouts upon termination due to the employee's inability to return to work.

Effective: 1 January 2024.

Annual Leave Provisions

Presently, an employee's minimum holiday entitlement comprises two components:

1. Four weeks of leave, as per EU law.
2. An additional 1.6 weeks of leave, as per UK law.

According to EU law, the four weeks of leave must be compensated at the "normal" pay rate, whereas the 1.6 weeks can be paid at the "basic" pay rate. Although there was a proposal to unify the pay rates, this has not been adopted, and the dual rates persist. However, employers retain the discretion to pay all leave at the higher "normal" rate.

Definitions of Normal and Basic Pay

"Normal Pay" encompasses basic pay along with:

1. Payments inherently tied to task performance mandated by the employment contract, including regular overtime and commission payments.
2. Payments based on professional or personal status such as seniority or qualifications.
3. Other regular payments made to the worker over the preceding fifty-two weeks, including overtime.

"Basic Pay" refers to the obligatory payment by the employer, inclusive of basic pay and any guaranteed overtime.

There remains ambiguity regarding which pay items fall under Normal or Basic Pay, likely to be clarified through case law. Similarly, guidance on determining the type of leave taken, and consequently, the appropriate pay rate remains unclear. In cases of differing holiday pay rates, the employment contract should ideally address the matter; otherwise, the safest course is to initially pay at the normal rate followed by basic pay.

Effective: 1 January 2024.

Rolled-Up Holiday Pay

The new legislation reintroduces the calculation of holiday pay using the 12.07% method, wherein each pay period includes an additional payment for holiday. This is computed as 12.07% of the employee's earnings in that pay period, based on the definitions of normal and basic pay provided earlier. There is no longer a requirement to consider the previous fifty-two weeks' earnings. The calculation of 12.07% is derived from dividing the annual leave of 5.6 weeks by the working year of 46.4 weeks (52 weeks less 5.6 weeks).

Given the complexity of determining normal and basic pay, many employers may opt for the simplified approach of calculating holiday pay as 12.07% of total pay in each pay period. This approach is administratively more convenient and eliminates uncertainties regarding pay elements. Holiday pay must be clearly delineated on the payslip as a separate item.

However, rolled-up holiday pay is only applicable to employees categorized as either part-year workers or workers on irregular hours. Consequently, such employees receive their holiday entitlement in each pay period and do not receive payment when they take leave.

Additionally, employers remain obligated to ensure that statutory minimum leave, proportionate to hours worked, is taken. This task becomes challenging when employers may not be aware of employees' leave schedules, particularly in cases of zero-hours contracts. Employers should endeavor to establish systems to record employees' holiday usage.

The new legislation provides definitions for part-year workers and workers on irregular hours, effective for holiday years commencing on April 1, 2024. For employers with calendar year holidays, the legislation takes effect on January 1, 2025.

Effective: 1 April 2025 or 1 January 2025.

Conclusion

While the introduction of new regulations may not resolve all practical issues for employers, the reintroduction of the 12.07% calculation method is viewed as a positive step. Employers should review their employment contracts and policies to determine necessary adjustments. Legal advice may be sought for contract modifications, ensuring employee agreement and clear communication. Employee consent to changes in holiday pay is unlikely if it results in diminished benefits.

As these changes have been enshrined in law, uncertainties in interpretation are expected to be clarified through case law over time, which may take at least a year or longer to materialize.