If you engage part time workers, or staff who work irregular hours, on permanent contracts you need to be aware of new rules affecting holiday pay calculations which take effect for holiday periods starting after 1 April 2024.
Getting holiday pay right is vital, as employers who make mistakes could be liable for extra costs going back up to two years.
Background
All workers (a broader term than just employee) are entitled to holiday pay. For a full time worker, the legal minimum holiday allowance is 5.6 weeks a year – being 20 days holiday and 8 days of bank holidays. Some employers may provide additional days on top as part of the worker’s contract.
For part time workers, prior to 2022, a common approach to calculating holiday pay for those entitled to the legal minimum was the ‘12.07% method’. Using the method, holiday pay was calculated as 12.07% of pay for actual hours worked. The logic was that if a full time worker received 5.6 weeks of holiday, that meant they actually worked 52 – 5.6 = 46.4 weeks, and so the ratio of holiday time to working time came out at 5.6 / 46.4 = 12.07%. For workers with additional contractual holiday, a higher percentage might apply, based on the same principles.
In July 2022 a Supreme Court Case changed the approach for calculating holiday pay for part time workers who work irregular hours. Instead of allowing employers to calculate holiday pay as 12.07% of the workers’ earnings, it was held that employers should ‘look back’ at the individual’s pay over the previous 52 week period – ignoring any weeks that they did not work – to calculate an average for their weekly pay. Such workers would then be entitled to 5.6 times that average weekly pay as holiday pay for the year.
Following the changes, some workers found themselves entitled to more holiday pay. Workers who worked on a ‘week on, week off’ basis benefited the most, as the weeks off were ignored when making the calculation and could result in an employee working this pattern receiving the same holiday allowance as a full time worker.
Consultation
In 2023, the Government launched a consultation about bringing back the old 12.07% approach. The outcome of this consultation has been the introduction of the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, which came into force on 1 January 2024. These regulations amend the Working Time Regulations 1998 and the 2006 TUPE Regulations as they extend to Great Britain only – workers in Northern Ireland will not be affected.
Employers will now be able to adopt the 12.07% approach again for their part time/irregular workers, but only for holiday periods which start from 1 April 2024. This means that for employers who use a calendar holiday year, the new rules will only apply from 1 January 2025.
The new rules will also permit employers to pay ‘rolled up’ holiday pay as part of the workers’ regular pay-packet, rather than paying holiday pay when they actually take annual leave. This practice had been ruled unlawful by the European Court of Justice in 2006.
Other changes
In addition to the changes above for part time workers, the new regulations will also bring in further modifications including:
- Removing the requirement to record daily working time for workers
- Revoking the Working Time (Coronavirus)(Amendment) Regulations 2020. These were brought in as an emergency measure to relax the restrictions on carrying leave forward during the pandemic. Anyone who still has leave carried forward under these rules that accrued before 1 January 2023 must take it by 31 March 2024.
- Bringing into UK law, EU-origin rules that allow workers who are unable to take leave because they are sick, or on maternity or unpaid parental leave to carry it forward for a maximum period of 18 months.
