UK’s ‘unclear’ new holiday pay regulations may catch bonuses, lawyer warns

The new regulations designed to simplify holiday leave and pay have created uncertainty and, potentially, huge financial risks for employers. That is the debate currently taking place in employment circles with a particular focus on the financial services sector where the stakes are especially high. We’ll consider that. 

These are the draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, which are set to take effect from 1 January 2024 and will apply from annual leave years starting on, or after, 1 April 2024. The regulations say that employers must include payments which are 'intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract' when calculating how much staff are paid while on holiday. On the face of it that relates to payments for overtime and commission, which employers are already required to factor into holiday pay, but it could, potentially, also include irregular payments such as bonuses. On that point the regulations do seem unclear.

Personnel Today covers this and quotes respected employment commentator Darren Newman who writes about it in some detail in his blog. He says it 'certainly covers a bonus linked to performance' and gives the example of how someone with a £1m annual bonus would be entitled to an extra £19,230 during a one-week holiday. He goes on, ‘without clarification that only regular payments will be affected, the law change 'opens the door to massive payments.’

The issue of bonuses is a big deal. The latest data shows bonuses made up 7.7% of UK workers' average weekly earnings in September 2023. A report in November by the CIPD found 11% of UK employers plan to give bonuses in the next 12 months. All sectors are potentially affected, but it is in the FS sector that this is of most concern – the cap on bankers' bonuses was lifted in October meaning a requirement to add a prorated cut could be very costly.

Was this foreseen by the government? It seems not. The regulations were assessed by a legislative scrutiny committee on 5 December 2023 and they raised no concerns about the impact they could have on bonuses. The draft bill was also waved through by the Regulatory Policy Committee, which was also, apparently, unconcerned by this issue, or unaware of it.

So let’s get a view on this. Earlier Chris Evans joined my by phone from the London office to discuss it. First question, is Darren Newman right?

Chris Evans: “Yes, I think he is because what is included within holiday pay should be payments, including commission, which are intrinsically linked to the performance of tasks which the worker is contractually obliged to carry out and it effectively gives rise to the potential that issues such as bonus and other elements of pay, which ordinarily people wouldn't consider as being relevant to the question of holiday pay, should be taken into account. I think what's important is that, because we have these new regulations coming in, I can very well see claimants, and claimants solicitors, taking the opportunity now to, effectively, use the new regulations to test the water to see what they can get through in terms of what’s included within the definition of holiday pay, and/or to create further leverage in relation to potential settlement going forward.”

Joe Glavina: “This certainly seems to play into the hands of claimants doesn’t it, Chris?”

Chris Evans: “I completely agree, and I think what employers are going to have to be alive to is this potential risk and ensure that if they are entering into settlement discussions they are very clear as to what their position first of all is in relation to this to avoid opening the floodgates to further individuals claiming that they are entitled to bonus, for example, as part of holiday pay. Also, it will factor into their consideration as to what represents a good package as part of any assessment discussions and I anticipate the majority of employers will take the view that we've never included it and unless and until there is case law that says we need to, we won't be including it. But it does create this rather uneasy and difficult scenario where it will be pressed, undoubtably, by claimants and their lawyers and I think employers will just have to be alive to the fact that this will be an issue and, in some sectors in particular where bonuses are very high, the potential cost of this, for example within the financial services sector, could be significant and while settlement packages often within that sector are higher than potentially other sectors, I think employers will just need to maintain a firm line that it's not included, they will not be factoring it into account as part of any settlement discussions, and maintain that line going forward and I think if there's a waiver from that, it will just open the door to many, many more claimants arguing that bonus, for example, should be taken into account as part of the holiday pay calculation.”

Joe Glavina: “Just thinking about the impact of this in the FS sector, Chris, we know the cap on bankers’ bonuses was lifted in October. Does that have an impact in this context?”

Chris Evans: “Potentially. The reason I say potentially is when the bonus cap was introduced, what you often saw was that fixed pay was increased to account for the fact that bonuses weren't going to be, or couldn't be, quite as high as they potentially were in the past. As a result, that fixed pay was going to be taken into account in relation to holiday pay calculations. I think it's not necessarily going to be an issue that we see in the next couple of years, but once we get to a stage where bonuses do increase to the level they previously were, in perhaps three, four, five years’ time - and there will be outliers, you know, the stellar performers who we do want to give significant bonuses to - it’s those sorts of cases, the million-pound bonuses per year, where actually if they take a week's holiday that's a significant sum of money which may need to be added into the pot in terms of what holiday pay is. As I say, whilst we may not see that next year, or the year after, and hopefully by that time we'll have helpful case law on what is and isn't included within the calculation of holiday pay following these regulations, if that question isn't decided by that point then there'll become a crunch point where it will become extremely relevant, and particularly for the FS sector, will become a high value point of litigation.”

Joe Glavina: “Final thoughts, Chris. What’s the advice you’re giving on this at the moment?”

Chris Evans: “So, my approach has always been that if an element of pay doesn't impact an employee taking holiday then it ought not to be included in the calculation of holiday pay because the whole purpose of the regulations is to avoid staff choosing not to take holiday because they need the relevant rest period. In my view, I don't think the new regulations change this on the basis that it codifies, effectively, what the case law was from a European perspective in order to provide this clarity. Rather conversely, it hasn't provided the clarity we need and has kept the door open to questions such as whether the bonus should be included. So, my message for employers is maintain the line that you've done to date which is if you're not dissuaded from taking holiday by virtue of a given payment, so for example you're always going to get that bonus anyway regardless of whether you took a week's holiday, I would not change tack on that. What I do think that employers need to bear in mind though is that this will be used against them in litigation and that they need to maintain perhaps a firmer line than they have in the past in settlement discussions and ensure that settlement agreements are entered into by staff when they exit. I know there are a number of clients, and a number of employers, who don't always enter into a settlement agreement on an exit taking place notwithstanding that payments, for example, are being made and I think it's even more crucial going forward because of this uncertain risk that settlement agreements are entered into particularly where a significant sum of money is being paid to facilitate that exit.”

The regulations are due to come into effect on 1 January 2024 so there is very little time for the government to look into this and make changes. If they do we will, of course, come back to this so do watch this space. Meanwhile we’ve included a link to the Personnel Today article in the transcript of this programme for you.

LINKS
- Link to Personnel Today article: ‘Legal expert calls new holiday pay regulations ‘incoherent’’