Martin Pratt, a partner in the employment team at law firm RWK Goodman, discusses new employment laws around holiday pay calculations that apply to all businesses, including retailers and manufacturers.

 

In a post-Brexit move designed to simplify the often bewildering rules surrounding holiday pay and working hours, the Government has unveiled a comprehensive set of reforms. Those reforms, the culmination of consultations initiated earlier in 2023, target the Working Time Regulations 1998 (WTR), which govern working hours and holiday entitlement. The Government hopes the imminent changes will simplify what has become an increasingly complex area of employment law.

Working hours record keeping

Many employers, particularly those in the retail sector with large workforces on a plethora of different working patterns, have found it difficult to keep up with the complex working hours record-keeping requirements the WTR imposed on them. As a result of the Government’s stated goal to give employers greater flexibility when ensuring compliance with the WTR, one of the changes is the simplification of record-keeping.

They hope employers can now adopt a more straightforward record-keeping process. The Government has decided to shift from the previous requirement of employers maintaining ‘objective, reliable, and accessible systems’ to record hours, to a more pragmatic requirement of just maintaining ‘adequate’ records. Whether that means more simplicity in practice remains to be seen.

Holiday entitlement for part-year and irregular-hour workers

Of particular importance to retailers that engage seasonal work or manufacturers that operate irregular hours are changes in holiday entitlement calculations for part-year and irregular hour workers. The Supreme Court said in 2022 that workers who only work part of a year should not have their paid annual holiday entitlement simply pro-rated. Since that judgment, the Government has endeavoured to simplify holiday entitlement calculations for part-year and irregular-hour workers.

Under the new method, irregular-hours workers, part-year workers and some agency workers will accrue leave at the rate of 12.07% of hours worked in a specific pay period. Meanwhile, other workers will continue to accrue 1/12th of their statutory entitlement monthly, to be adjusted proportionately thereafter. This hopes to achieve parity in annual leave accrual between part-year and irregular-hours workers and those with a consistent yearly work pattern and to simplify administrative processes and cut costs.

A partial return of “rolled-up” holiday pay

The Government has decided that rolled-up holiday pay should also be introduced for irregular hours and part-year workers. Rolled-up holiday pay, currently unlawful, is a method of compensating workers for their holiday entitlement by including an additional portion of pay within their regular wages or salary.

Instead of paying them when they take time off for vacation, their wages are calculated to include an element that represents the value of their accrued holiday. From 1 April 2024, rolled-up holiday pay will be allowed for workers with irregular hours or who work part-year, again, patterns that particularly impact the retail sector. This will also be calculated at 12.07% of all earnings in a pay period. It must be paid at the same time as the pay for work performed, as well as itemised separately on a payslip. The draft Regulations set out clear definitions of who irregular-hours workers and part-year workers are. Employers must check whether a worker falls under the relevant definition before simply adopting rolled-up holiday pay for them.

‘Normal’ vs ‘additional’ holiday pay

Back in 2008, the basic holiday entitlement under the WTR increased from 4 weeks to 5.6 weeks. As a result, an anomaly arose. Workers today enjoy 4 weeks of annual leave at their “normal” rate of pay, plus an additional 1.6 weeks at “basic” rate. The question of what ‘normal’ means has remained complex, and what should be included on top of ‘basic’ pay? Help is on the way.

Although the distinction between the two ‘pots’ of leave stays, clarification as to what constitutes ‘normal’ pay will be forthcoming, so employers will know exactly when, for example, commission and bonus needs to be included in holiday pay calculations.

This is just the start

The Government hopes that the planned changes will be helpful to businesses. With the new regulations due to come into force on 1 January 2024, employers should ensure that their systems and holiday calculation methods meet the new requirements. And there’s likely more to come. The Government says it is considering further, more radical, reforms to the rate of holiday pay, so more changes may be coming very soon.