Government sets out plans to simplify holiday pay post-Brexit

The government has confirmed plans to allow rolled-up holiday pay and to merge the current two separate leave entitlements into a single pot of statutory annual leave entitlement. The plan appears in the government’s policy paper ‘Smarter regulation to grow the economy’ which was published a fortnight ago. The paper also includes a plan to cap non-compete clauses at 3 months’ duration and a change to TUPE, both of which we covered in this programme last week. 

There are two key changes to holiday pay which will come about through amendments to the Working Time Regulations. The first involves merging the four weeks’ EU-derived annual leave entitlement with the UK’s additional 1.6 weeks statutory annual leave into a single entitlement. This will mean the full 5.6 weeks of annual leave will be treated the same when carrying it over into the next holiday year and for the purposes of calculating payment in lieu of notice – currently the two are treated differently. 

The second change will allow employers to ‘roll up’ holiday pay so that an employee’s hourly rate is inclusive of holiday pay and will mean that, as the government puts it, ‘workers can receive their holiday pay with every payslip’, an approach that is currently unlawful in the UK. The government says the change could benefit flexible workers who would prefer their entitlement to be paid as they work. That news has been widely welcomed by agency workers and those who present them who have long argued that unscrupulous employers use the current complex and unclear system to deprive them of their full holiday pay entitlement.

So, what do we make of the planned reforms? Earlier Anthony Convery joined me by phone from Glasgow to discuss it. First the proposals: 

Anthony Convery: “There are two key proposals in relation to holiday pay. The first one is rolled up holiday pay and what the government is proposing is to allow holiday pay to be rolled up and I think this really just reflects the reality that many employers of workers with variable hours, and shifts, already roll up holiday pay into basic pay. This is done instead of paying holiday pay in the pay period when the holiday is actually taken and it's technically a breach of the of the existing legislation and case law. It's a practice that driven by the administrative complexity of calculating holiday pay for these workers and it is a technical breach because the reality is that it is done in practice, the rolling up of holiday pay, and the case law has suggested that although it's technically in breach of the working time regulations there's no actual remedy for workers as long as they do receive the pay, but I think the proposed reforms give some clarity in this area and they would clarify that the practice of rolling up holiday pay is permitted.”

Joe Glavina: “So, assuming the change happens, what difference will it make in practice in your view?”

Anthony Convery: “So, what the government is proposing is to merge the current two separate annual leave entitlements into one pot of statutory annual leave but what I would have to say is that the precise implications of this proposal are still unclear. At present, workers have two separate types of annual leave. There is four weeks’ leave which is derived from the European legislation but on top of that there's a UK-specific entitlement to 1.6 weeks’ leave and what the government is proposing to do is to merge that into one pot of 5.6 weeks annual leave which, at first glance, seems much simpler and seems like a sensible way forward but at present it's unclear what this means for the rates that holiday pay is paid at because one of the key differences between the two types of annual leave at present is the rate of pay because for many workers the four weeks’ annual leave, which derives from the European legislation, has to be paid at normal remuneration. So that means, essentially, looking at average pay over a reference period, but the 1.6 weeks UK-specific entitlement only needs to be paid at basic pay. So, there are these two different rates and if the government is going to create a single pot of 5.6 weeks’ leave it, we'll have to have a single rate of pay because otherwise there'd be no point in merging the two leave entitlements together and the government has, this week, just launched the consultation on precisely that point. They are seeking employers’ views because the options are either it's 5.6 weeks at normal remuneration, which will increase costs for some employers, or it's 5.6 weeks at basic pay, which would mean an effectively a pay cut for some employees, and the precise outcome of that remains to be seen.”

Joe Glavina: “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 actually take the time off and that they’ll work instead and earn a bit more. So, presumably it will be important that employers have checks in place to make sure they do actually take their holidays and that’s not overlooked.” 

Anthony Convery: “No, no, absolutely. It’s always good practice to ensure that workers are taking their holidays from HR systems’ point of view, but I think when holiday pay is being rolled up it is even more important to make sure that that's the case.”

Holiday pay is a hugely complex area but these changes to holiday pay are explained very well in Personnel Today’s article ‘Holiday pay changes – how entitlement will be simplified’ and we’ve put a link to it in the transcript of this programme. We have also included 
links to our programmes on non-compete clauses and TUPE. That’s ‘Non-compete clauses to be capped at 3 months’ and ‘Government’s policy paper ‘a missed opportunity’ for TUPE reform.’

LINKS
- Link to HRNews programme: ‘Non-compete clauses to be capped at 3 months’
- Link to HRNews programme: ‘Government’s policy paper ‘a missed opportunity’ for TUPE reform’
- Link to Government’s policy paper: ‘Smarter regulation to grow the economy’
- Link to Personnel Today article: ‘Holiday pay changes – how entitlement will be simplified’