On the 12th May 2023, the Government announced the launch of a consultation entitled: 'Retained EU Employment Law: Consultation on reforms to the Working Time Regulations, Holiday Pay, and the Transfer of Undertakings (Protection of Employment) Regulations'. The consultation is open until the 7th July 2023.
Amongst the issues being addressed within this consultation, are proposals by the Government to simplify the calculation of holiday pay. The other issues being examined by the consultation are proposals to reform the record keeping and reporting requirements under the Working Time Regulations 1998, and changes to the consultation requirements relating to TUPE.
Holiday Pay Consultation
The Government is proposing to make the following changes in relation to holiday pay: (a) the way in which the entitlement to annual leave and holiday pay is calculated; and (b) the introduction of what is known as ‘rolled-up’ holiday pay (a system which is currently unlawful, in which employers combine the payment of basic pay and holiday pay into one payment) to address the complexities of calculating holiday pay for what is known as 'atypical workers' (i.e. those not working full-time for a single employer), such as agency workers and casual workers
Calculating Annual Leave And Holiday Pay
Currently, holiday pay consists of two separate entitlements. The first is an entitlement to 4 weeks of annual leave under regulation 13(1) of the Working Time Regulations 1998 (i.e. the EU minimum derived from the EU Working Time Directive), whilst the second is an entitlement to 1.6 weeks of annual leave under regulation 13A of the Working Time Regulations 1998 (additional leave given to UK workers over and above the EU minimum). Accordingly, UK workers have a combined entitlement to 5.6 weeks of annual leave (i.e. 28 days for full-time employees).
Calculating holiday pay under these different leave entitlements has become overly complex. For example:-
- Whereas in relation to the 4 week entitlement, regular voluntary overtime and normal non-guaranteed overtime, bonuses and commissions must be included in the holiday pay calculation to reflect 'normal remuneration', they are not included in the 1.6 week calculation, which need only cover basic pay unless the workers contract confirms otherwise. Some employers simply pay 'normal remuneration' in relation to all holiday pay paid, as the administrative costs involved in distinguishing between the two entitlements would be prohibitive
- Whereas in relation to the 4 week entitlement, holiday pay must be carried over where a worker is prevented from taking their leave entitlement due to a period of statutory leave (e.g maternity leave), or by long-term sickness absence, the only circumstances in which the 1.6 week entitlement must be carried over is if the employer and employer have agreed the same in writing.
- The Working Time Regulations 1998 failed to specify the order in which the 4 week and 1.6 week entitlements should be taken during the holiday year
- According to Regulation 15A, employees are required to accumulate 1/12th of their yearly leave allowance at the beginning of each month for the duration of their first year of employment. However, it is ambiguous as to which leave entitlement is accrued first.
Accordingly, given this, the Government have proposed that the whole system be simplified by creating a single overall entitlement to 5.6 weeks of annual leave.
In terms of how holiday pay will be calculated, the consultation paper states: "We will use this consultation to explore how to define the rate of holiday pay in legislation. We recognise that....businesses could face significant additional costs if the entire 5.6 weeks of leave was required to be paid at a worker’s normal pay rate as a minimum. However, we also recognise the financial impact that requiring the 5.6 weeks of leave to be paid at a worker’s basic pay rate as a minimum would have on workers...What is considered ‘normal remuneration’ or pay is currently not clearly defined....We are seeking views...on how holiday pay is currently calculated and how they think it should be defined in legislation."
In terms of carry over, the paper states: "No change from current arrangements: workers will be allowed to carry over 1.6 weeks into the following leave year if there is a written agreement between a worker and their employer. Not normally permissible to carry over the entire statutory annual leave entitlement, except where a worker has been unable to take it in certain scenarios: * Being on long-term sick leave * Being on maternity, paternity, adoption, or parental leave."
‘Rolled-Up’ Holiday Pay
The Government propose to introduce 'rolled-up' holiday pay for all workers, not just atypical workers, in which employers combine the payment of basic pay and holiday pay into one payment.
Under the proposed system, employers would pay an extra 12.07% on top of basic pay in relation to holiday pay every month, regardless of whether they've taken time off or not.
The percentage of 12.07% is derived from the proportion of the annual leave entitlement as compared to the number of working weeks each year, which amounts to 5.6 weeks of leave divided by 46.4 working weeks. That is, 5.6 weeks annual leave is equivalent to 12.07% of the total hours worked.
Overlap With Other Consultation
The new consultation overlaps with an existing consultation, which relates to how holiday entitlement for employees who work irregular hours or for part of the year will be calculated in accordance with the recent ruling of the Supreme Court in Harpur Trust v Brazel (2022).
