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Understanding the 2024 UK Holiday Pay and Entitlement Reforms

22 February 2024

As of 1 January 2024, new regulations on holiday pay and entitlement were introduced in the UK. These changes are intended to simplify how holiday pay is calculated, promote fairness, and improve transparency. Here at Redkite Solicitors, we understand that these changes may cause some confusion and concerns, particularly for business owners and managers. In this blog post, we’ll provide you with an overview of these changes and what you need to know to ensure compliance.

What are the 2024 changes?

In November 2023, the Government published several modifications to the existing regulations governing holiday pay and annual leave entitlement, along with draft legislation outlining the implementation of these adjustments.

The key amendments, stated to come into effect for holiday years starting on or after April 1 2024, are:

1. The reintroduction of the 12.07% calculation method for determining holiday pay for individuals with irregular work hours and seasonal or part-year employment.
2. The reinstatement of rolled-up holiday pay for individuals with irregular work hours and those employed seasonally or part-year.
3. Modifications to the rules regarding the carryover of unused holiday days.
4. Adjustments to the definition of a week’s pay for the computation of holiday pay.

These changes are due to come into force on April 1^st 2024, but will only apply to businesses whose leave years start from 1^st April 2024 onwards. Those with January to December leave years will not be impacted by the changes until January 2025 for example.

These represent the most significant changes to holiday pay regulations in quite some time. The proposal to allow employers to use rolled-up holiday pay for casual workers is expected to benefit employers and will likely be met with widespread approval from both employees and employers.

Some aspects of these changes are more technical and are anticipated to pose new challenges and questions for employers. Given the potential complexities involved, employers must stay informed about these changes and proactively plan to implement them effectively.

Holiday entitlement v holiday pay

It is helpful first to distinguish the difference between holiday entitlement and holiday pay.

Holiday entitlement is simply the number of hours/days’ holiday entitlement an employee is entitled to take over the holiday year. The statutory minimum holiday entitlement for all employees in the UK is 5.6 weeks during each holiday year, pro-rata to the number of contracted hours an employee works. Employers may exercise discretion to increase employees holiday entitlement beyond the statutory 5.6 weeks.

Holiday pay is the rate of pay that an employee is paid when they take holiday entitlement. An employee’s holiday pay should reflect the regular sums they receive if they were working, including any overtime.

Breaking down the holiday pay changes

1. Reintroducing the 12.07% calculation method for determining holiday pay for individuals with irregular work hours and seasonal or part-year employment

Determining holiday pay for those working irregular hours and part-year workers presents a challenge for employers.

It is important to note that this change is not intended to be used for regular contracted workers and is only to be used for casual and irregular hours staff who don’t have minimum contracted hours.

Who are considered “irregular hours workers” and “part-year workers”?

Under the new legislation, an “irregular hours worker” is someone whose contract terms state that their hours will mostly or wholly vary during every pay period, such as workers on zero-hours contracts. Conversely, “part-year workers” have contracts that only require them to work for part of the year, with minimum periods of one week where they neither work nor are paid. A common example of this is term-time workers, who only work while schools are in session.

Calculating holiday entitlement for irregular hour workers and part-year workers

Under the new laws, the new holiday entitlement accrual method will determine an employee’s holiday entitlement based on 12.07% of the hours they worked in the previous pay period. This is the correct percentage to be used for employees who are only entitled to statutory minimum holiday entitlement.

Why 12.07%?

The reason 12.07% is used to calculate holiday entitlement is because employees are entitled to a statutory minimum holiday entitlement of 5.6 weeks, which is 12.07% of the 46.4 working weeks in a year.

In the event that full time employees are entitled to additional holiday beyond the statutory entitlement, this will also change the calculation to determine irregular and part-year workers holiday entitlement, so it is important this is taken into consideration when calculating holiday entitlement.

Calculation

In order to determine holiday entitlement under the new accrual method, the hours the worker has worked in a particular month will need to be divided by 100 (step 1); this answer will then be multiplied by 12.07% (statutory holiday entitlement as a percentage) (step 2) and the answer will need to be rounded to the nearest hour (step 3). This might be best explained through an example:

Example

Lily is a waitress who works varied hours each week. Lily’s Contract of Employment confirms that her contracted hours will be mostly variable in each pay period. Lily is therefore classified as an irregular hour worker.

Lily gets paid monthly and is entitled to the statutory entitlement of 5.6 weeks holiday, pro-rata to the hours she works in a pay period.

During January 2024, Lily worked 144 hours.

Applying the calculation above:

Step 1 – 144/100 = 1.44

Step 2 – 1.44 X 12.07 = 17.38

Step 3 – Lily would have accrued 17 hours’ holiday entitlement from her hours worked in January 2024.

2. Reinstating rolled-up holiday pay for irregular-hours workers and seasonal workers

A further amendment following the Government’s reforms includes changes to the way in which holiday pay can be calculated for part year and irregular hour workers.

Rolled-up holiday pay is the process where a worker receives an additional amount or enhancement of pay with every payslip to cover their holiday pay, as opposed to them physically taking annual leave and thereby receiving holiday pay when they take annual leave.

There has previously been concern about employers spreading holiday pay throughout the year rather than paying out for holiday when it is taken, also called, “rolled-up” holiday pay. Critics argue that rolled-up holiday pay leads to employee exhaustion due to them choosing to receive higher pay upfront by not taking their accrued holiday, but many employees appreciate the option. Employers across multiple sectors have, in practice, been distributing holiday pay for irregular hours and seasonal workers this way for years.

Because it is more complicated to calculate annual leave entitlement for irregular hours workers than for those who work regular hours, the new legislation states that for holiday years from 1 April 2024, holiday pay can now be rolled up for irregular hours and seasonal workers only.

Do all employers have to adopt the rolled-up holiday approach?

In short, no. There is no requirement that employers adopt the rolled-up holiday pay approach, it is completely optional. However they do need to give thought to how they will be addressing holiday entitlement and holiday pay with employees.

In cases where employers choose to use rolled-up holiday pay, they should seek further advice as to how best to implement that within their organisation.

Employers remain responsible for encouraging employees to take their annual leave if they do not opt for the rolled-up holiday pay approach for irregular and part-year workers.

3. Modifying the carryover of unused holiday days rules

Employees are required to take their statutory holiday entitlement during the leave year. However, sometimes in practice employees may forget to take holiday entitlement or may not be given a reasonable opportunity to take leave by their employer. In this case, employees may be eligible to carry over any unused holidays to the following leave year.

Previously, the right to carry over holiday entitlement from one year leave year to the next was set out in EU case law, which was unclear and often confusing for UK workers. The new provisions of the Working Time Regulations which are due to take effect from 1^st April 2024 set out explicit employee rights and employer responsibilities regarding carrying over paid annual leave and adding it to the following year’s holiday entitlement.

It is important to note that the provisions relating to the carryover of unused holiday days relate to not only irregular hours workers or part-year workers, but also regular workers.

In what circumstances can a worker carry-over holiday to the following leave year?

How much holiday (if any) a worker my carry over from one leave year to the next will be determined by an employee’s Contract of Employment or the Company Handbook.

Under the new provisions of the Working Time Regulations, there are however limited circumstances in which workers may be entitled to carry up to 28 days holiday entitlement from one leave year to the next.

Under the new rules, a worker is entitled to carry up to 28 days of holiday over each year if they are unable to take paid holiday due during a leave year due to any of the following reasons:

1. The employer refuses to pay a worker their holiday pay entitlement;
2. The employer fails to provide reasonable opportunities to take leave;
3. The employer neglects to inform the worker about the use-it-or-lose-it nature of their leave entitlement;
4. The employee has been off sick; and/or
5. The employee has been off due to maternity or other family-related leave

This aligns with the previous EU stance, allowing employees to carry over their leave yearly until the employer rectifies the issue.

In practical terms, this underscores the importance for employers to accurately determine the employment status of all individuals within the organisation and establish systems and documentation that communicate the right to take holiday, encourage employees to use their entitlement throughout the year and clarify if unused holiday will be forfeited if not taken.

If a worker gets more than the statutory minimum 28 days’ holiday entitlement, they may be entitled to carry over the additional untaken leave beyond the 28 days. Both employees and employers are encouraged to check their Employment Contracts and Company Handbook to determine the position.

When does a worker have to use any carry-over holiday by?

Any carry-over holiday from one leave year to the next due to the reasons listed above must be used by the worker within 18 months of the end of the leave year in which the carry-over holiday accrued.

How is carry-over of unused holidays paid?

Workers will be entitled to their normal pay when using any carry-over holidays up to the 4-week statutory holiday entitlement.

For workers who are entitled to additional holidays over the statutory entitlement of 28 days, how these workers will get paid for the additional days should be set out in the Contract of Employment or Company Handbook.

In circumstances where an employer adopts the rolled-up holiday approach for irregular and part time workers, any annual leave carried over will already have been paid at the time the work was done.

4. Adjusting the definition of a week’s pay for determining holiday pay

The ongoing debate concerning holiday pay has revolved around the inclusion of various additional payments, such as regular overtime payments, commission payments, bonuses, call-out payments, and some other payments in the calculation of holiday pay. EU cases determined that holiday pay should be based on the worker’s actual normal pay, extending beyond basic wages. Subsequently, UK law extended the calculation period for variable-pay employees to 52 weeks, aiming to reflect the average hourly rate of pay over the past year.

The new laws seek to reaffirm and codify these principles. However, it is important to note that although holiday pay is no longer governed by EU rules, the new legislation will still distinguish between the 4 weeks’ statutory holiday, guaranteed by EU laws as a minimum entitlement, and the additional 1.6 weeks granted to UK workers as a minimum holiday entitlement (referred to as regulation 13A holiday).

Under the new rules, there will be two calculation methods: “normal remuneration” provisions for the first 4 weeks of statutory holiday pay (including irregular hours and part-year workers), which specify the types of payments to be included, and the older definition of a week’s pay for the remaining 1.6 weeks, determined by factors like normal working hours and other considerations as outlined in the Employment Rights Act 1996.

Final thoughts

The UK’s 2024 holiday pay and entitlement reforms, effective from 1^st January 2024, bring significant changes aimed at simplifying calculations, especially for those who work irregular hours, enhancing fairness, and encouraging transparency in the holiday pay system. While these changes should be helpful, the legislation still contains grey areas that are expected to be addressed with further changes to UK employment law. At Redkite Solicitors, we recognise that these alterations may raise concerns and questions, particularly for employers and HR professionals.

These changes, while reflecting some prior EU principles, mark a significant shift in the UK’s approach to leave entitlement and how holiday pay is calculated. Employers must remain vigilant, accurately assess worker categories, and establish effective systems to communicate holiday rights, encourage leave utilisation, and ensure compliance.

Employers will need to review their existing arrangements for calculating holiday entitlement and holiday pay in advance of these changes coming in to force to ensure that they remain legally compliant. However we appreciate that these changes can be quite complicated for some business structures.  As we navigate these changes, understanding the nuances of these reforms is crucial for both employers and employees to ensure a smoother transition into this new era of holiday pay regulations. Redkite Solicitors is here to provide guidance and support through these changes and address any legal challenges that may arise.