Rolled up holiday pay is back!

The response has confirmed that it will proceed with the proposal to reintroduce an employer’s ability to pay ‘rolled up’ holiday pay, but in a slightly watered down form compared to what was originally announced.  In addition, it has confirmed that the proposed changes to TUPE, and the proposed clarification of the record keeping requirements under the Working Time Regulations, will go ahead.

‘Rolled-up’ holiday pay

When the consultation was first launched on 12 May 2023 the Government initially proposed to introduce ‘rolled-up’ holiday pay for all workers and employees, whether full time, part time, or some other arrangement.  We discussed this proposal more fully on our podcast available here at the time but, put simply, ‘rolled-up’ holiday pay is where a worker receives an enhancement with every payslip to cover their holiday pay, as opposed to receiving holiday pay when they actually take annual leave.

This proposal for universal rolled up holiday pay was not popular with the respondents to the consultation with only 12% of respondents agreeing that rolled-up holiday pay should be introduced as an option for employers in relation to all workers. However, feedback was received from stakeholders who suggested the main identified benefits of ‘rolled-up’ holiday pay were only applicable in relation to irregular-hours and part-year workers, rather than full timers and those with fixed part time hours, for whom there would seem to be little benefit to ‘rolled-up’ holiday pay and a higher risk of disincentivising leave. As such, the proposal to introduce it for part-year workers and those who work irregular hours seems to make sense.

The proposal that will be taken forward is that employers can calculate holiday pay for those workers at a rate of 12.07% of the pay earned during a pay period, to be added to the worker’s pay, instead of them accruing leave.  This figure is derived from the fact that 12.07% is 5.6÷46.4, where 5.6 is the statutory annual leave entitlement and 46.4 is the number of working weeks in a year after statutory annual leave is deducted.

Calculating holiday entitlement for part-year and irregular hours workers

A key underlying driver of the need to reform holiday pay rules was the Supreme Court ruling in the case of Harpur Trust v Brazel last year, which led to significant difficulty in the calculation of holiday for part-year workers, casual workers, agency workers and others with irregular or unpredictable working patterns.

Previous to the ruling many employers used the 12.07% approach for calculating holiday pay for workers with irregular hours.  However, in Harpur Trust this practice was expressly found to be non-compliant with the Working Time Regulations for part year workers and that the 5.6 weeks’ annual leave entitlement under the WTR 1998 should not be reduced pro rata for “part-year workers”.

This ruling has led to a situation where some workers on part year contracts receive proportionately more paid holiday, relative to the hours they work, than some workers on full time contracts.

As such, the Government has responded to the consultation by confirming that for holiday years from 1 April 2024, irregular hours and part-year workers will accrue annual leave entitlement on the last day of each pay period at the rate of 12.07% of the number of hours that they have worked during that pay period, subject to a maximum of 28 days per year.

This change is likely to be a significant relief to employers especially those with significant numbers of irregular and part year workers.

Single annual leave entitlement

The Government has confirmed that it will not take forward the proposal to introduce a single annual leave entitlement incorporating the four weeks’ annual leave mandated by EU law and the 1.6 weeks’ additional leave prescribed by the Working Time Regulations.

Currently these two ‘pots’ are treated quite separately by case law and regulation and, significantly, attract different minimum rates of pay. The four weeks’ annual leave must be paid at ‘normal’ pay, which means including overtime and commission in the calculation. Whereas the 1.6 week’s additional leave prescribed by the Working Time Regulations can be paid at the rate of ‘basic pay’. The Government has concluded that combining these two pots will only make sense if there is a single rate of minimum holiday pay and they have not reached a conclusion on this point.

The Government has, however, decided to legislate to clarify what elements form part of normal renumeration. The draft regulations stipulate that pay for the four weeks’ annual leave previously mandated by EU law must include:

• 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.

In effect this simply re-states the growing body of EU case law on these four weeks so this should not represent a significant change.

Whilst this may be disappointing for those who hoped the Government would take this opportunity to simplify this potentially confusing distinction, it may also be a relief for those who feared either a return to basic holiday pay only and the associated financial loss for employees, or the extension of ‘normal pay’ holiday to an additional 8 days per year, increasing the financial burden on employers.  Perhaps, although there is little logic to retaining the status quo, it is the only pragmatic way to avoid either going back on the Government’s pledge to not roll back worker rights, while not increasing the burden of costs on the shoulders of employers. This whole point is caveated by the fact in the Government’s response they stipulate that they are considering “more fundamental reforms to the rate of holiday pay”. So, watch this space…

TUPE

The Government has confirmed they will go ahead with their proposal to change the consultation obligations that apply to TUPE. In advance of a TUPE transfer, employers need to inform and consult with the affected workforce’s existing representatives, or arrange elections for representatives if they are not already in place before the transfer takes place.

Regulation 13A of the TUPE regulations already allows microbusinesses (with fewer than 10 employees) to consult directly with their employees in worker representatives are absent. The Government has confirmed they will be extending this flexibility to small businesses (with fewer than 50 employees) and all businesses when transferring fewer than 10 employees.

This avoids a common difficulty where there is, in principle, a need to elect representatives in relation to very small TUPE situations, affecting only a small handful of employees, and is a sensible pragmatic change to the current law.

Carry over of annual leave

The Government has also confirmed in its response that it will enshrine in legislation various pieces of EU case law that it considers necessary to retain workers’ overall level of protection and entitlement in relation to carry over of annual leave when a worker is unable to take their leave due to being on maternity/family related leave or sick leave.

The draft regulations appear to deal with this point by confirming that workers will be able to carry forward their full 5.6 weeks’ statutory annual leave into the next year if they can’t take it due to family leave, and that workers will be able to carry forward their four weeks annual leave mandated by EU law if they can’t take it because of sick leave. However, they do stipulate that this leave must be used up within 18 months of the end of the holiday year in which the entitlement originally arose.

This is increased level of certainty in the carry over rules is likely to be popular with employers as it will be of great assistance when dealing with employees who have been on long term sick leave for a number of years and managed to accrue a significant holiday entitlement on termination.

Record Keeping under Working Time Regulations

The Government has confirmed they will proceed with the proposed clarification to the record keeping requirements under the Working Time Regulations.

This clarification is required as a result of a recent ruling from the European Court of Justice in Federación de Servicios de Comisiones Obreras (CCOO) v Deutsche Bank SAE, which implied a requirement on employers to record the duration of time worked each day by each worker.

The confirmed proposals will make it clear that such detailed record keeping will not be required, relieving employers of a significant additional record keeping burden.

What’s next…

The updated regulations are due to come into force on 1 January 2024, so it is not long now!  It can be a good time to look at your policies and procedures and ensure they will be compliant with the new regulations.