UK Government publishes draft legislation on holiday entitlement and pay

The Government has published draft legislation to implement important changes to holiday rights under the Working Time Regulations. The draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 follow the Government’s response to two consultations covering a raft of holiday pay issues generated by EU law and domestic case law. Most of the changes are due to come into force very soon on 1 January 2024 and will impact most employers in one way or another, especially those who utilise irregular hours workers extensively, and those in the sectors who engage seasonal or part year workers. We’ll speak to a holiday pay expert to understand exactly how employers will be affected.

The changes are summarised by Stuart Neilson and Anthony Convery in their Out-Law article ‘Draft reforms to UK holiday pay rules leave room for future changes’. In summary, following the pair of consultations which ran earlier this year, the Government has made two big decisions. The first is to allow the practice of rolling up holiday pay in certain cases. So, allowing employers of atypical workers to pay them an additional sum in respect of holiday pay each month, regardless of whether any holiday was taken during that period. As Personnel Today reports, that’s a decision that employers didn’t want to see - only 4% of employers agreed rolled-up holiday pay should be introduced as an option for all workers and only 6% of workers who responded to the consultation supported the proposal. The consolation is that the government has decided that it will only pursue it as an option for those with atypical hours, not for all workers. Also, the government have decided not to go ahead with plans to introduce a 52-week holiday entitlement reference period for workers with irregular hours.

The second big change is the decision not to merge the current two separate leave entitlements into a single pot of statutory annual leave entitlement. So, the government will not pursue its plan for a single annual leave entitlement of 5.6 weeks with a single rate of pay and will continue to maintain the two distinct pots of annual leave and the two existing rates of holiday pay. So by keeping two distinct pots of leave the government hasn’t simplified things, but in practice many employers have been paying all 5.6 weeks annual leave at the higher ‘normal pay’ rate so they can continue with that if they choose. 

One area which the regulations don’t cover is the issue in the recent Supreme Court ruling in Agnew. We covered the issue at the time in ‘GB employers face ‘limited but significant’ exposure to historic holiday pay claims after Agnew’ where the Supreme Court made it clear that a gap of three months between underpayments of holiday pay does not automatically break the chain of a series of deductions. One of the issues in Agnew which the Supreme Court have spelt out is that holiday is not necessarily disaggregated into Working Time Directive leave, UK statutory leave and contractual leave. The default position is that each day’s leave is a composite of all three. This adds complexity because different rules about carry forward and pay apply to the different types of leave. The latest draft regulations don’t deal with that issue, unfortunately, and we continue to field questions from clients on this.

So, let’s get a view on all of this. Anthony Convery is an expert on holiday pay and earlier he joined me by phone from Glasgow to discuss it. First, that Agnew point: 

Anthony Convery: “The draft legislation doesn't address the Agnew issue and leaves open the question of, when an employee or a worker takes a day of annual leave, which type of annual leave is that, and what rate is paid? Since the draft legislation maintains two different rates of pay for most workers, that is still an open question and what we are saying to clients is that, to give certainty, and to avoid claims that particular days of holiday have been underpaid, it is best now to be clear, whether it's in a contract, or in a holiday pay policy, or a notice on the company intranet, just being very clear to employees and workers which days of annual leave are paid at which rate. So, in practice that means saying to a full time worker the first 20 days annual leave is regulation 13 leave, and then the next eight days would be regulation 13A leave, and then any remaining days would be contractual leave, and just being very clear about which order the leave is taken in.”

Joe Glavina: “Moving on to rolled up holiday pay, Anthony, the government says the change will mean workers can receive their holiday pay with every payslip, which simplifies matters, but the obvious snag is there’s a risk workers will choose not to take the time off and that they’ll work instead and earn a bit more money. So, presumably it will be important that employers have checks in place to make sure they do take their holidays and that’s not overlooked?”

Anthony Convery: “Where rolled up holiday pay is paid there's a particular onus, from a health and safety point of view, on the business and on HR to make sure that workers are taking their annual leave. So that can be spelling it out in a policy that the leave should be taken, and also issuing remainders during the year, and if people aren't taking their leave auditing it and issuing remainders that they haven't taken any leave to make sure that they do. This ties in with one of the aspects of the draft legislation which is the draft legislation now puts in statute the fact that leave will be carried over if workers don't have the opportunity to take it. So it is particularly important to employers that they make their workforce aware of their annual leave entitlement and the fact that it should be used and if it's not used, it will be lost.”

Joe Glavina: “There is a completely new provision designed to correct flaws identified by the Supreme Court in the Harpur v Brazel case, i.e. the problem with the current rules not allowing annual  leave entitlement to be lawfully pro-rated downwards to reflect hours actually worked. Thoughts on that? A welcome change I guess?”

Anthony Convery: “I think the changes in relation to irregular hours workers, or part-year workers, are quite positive from an employer's point of view because they effectively reverse the effect of the Harpur decision and they mean that workers in those two categories are only accruing holidays when they're actually working, but I think an important thing for employers to think about is just to be very sure because these changes are only in relation to rolled up holiday pay and also the accrual of holiday for a irregular and part-year workers. They only apply to workers in those categories and the category of irregular hours worker and part-year worker is defined in the legislation so you do need to look at your workforce and be confident that they do fall within that category. So that's the number one thing to think about. Thereafter, it's important just to make sure that the rolled-up holiday pay arrangements and the accrual of holiday for part-year workers, or irregular hours workers, is very clearly explained to employees so that there can be no question that their holiday pay has been calculated correctly and, if there are claims in the future, you're able to show the tribunal that that has been very clearly explained and understood.”

Joe Glavina: “So is the main message to employers to review your holiday arrangements and your holiday pay practices in light of this new legislation?” 

Anthony Convery: “Yes, absolutely. The new legislation is a really good opportunity for employers just to look at their holiday pay policies and practices and just make sure that everything is in order. A lot of the proposals are designed to reflect the existing position from European case law, but the fact that it's now in legislation just brings a particular focus to it. I’m thinking of things like carry over of leave and making sure that workers have the opportunity to take their leave. I think there are a number of things that employers need to look at just to make sure that they are ticking all the boxes in terms of what the legislation requires.”

If you would like more detail on all those changes then we suggest you take a look at the Out-Law article on this by Anthony and Stuart Neilson. That’s ‘Draft reforms to UK holiday pay rules leave room for future changes’ and we’ve put a link to it in the transcript of this programme.

LINKS
- Link to Out-Law article: ‘Draft reforms to UK holiday pay rules leave room for future changes’