The government has published guidance to accompany recent legislative reforms to holiday entitlement and pay. Unfortunately, the guidance fails to provide clarity in a number of key areas, so we will need to await judicial interpretation of the new regulations by the courts.
Recent legislative changes
The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (the regulations) came into force on 1 January 2024. They make significant changes to the rules on calculating holiday entitlement and pay, which we discuss here. On the same day on which the regulations came into force, the government published new guidance, "Holiday pay and entitlement reforms from 1 January 2024". The guidance does not have statutory status, therefore, where the guidance and regulations sometimes conflict, the regulations take precedence. Indeed, the guidance does not purport to “provide definitive answers to all individual queries. It is not intended to be relied upon in any specific context or as a substitute for seeking advice (legal or otherwise) on a specific circumstance, as each case may be different.”
We consider three key aspects of the guidance.
1. Definitions of irregular hours workers and part-year workers
The guidance expands on the definition of “irregular hours worker” and “part-year worker” (in relation to the introduction of new methods of calculating holiday accrual and pay for these categories of workers) by providing some practical examples of workers that fall within and outside the relevant definitions.
The regulations confirm that “a worker is an irregular hours worker, in relation to a leave year, if the number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable.” The guidance contrasts the examples of Kevin, a hospitality worker who works a different number of hours each week (for example, under a casual or zero hours contract), and Paul, who has a rotating fortnightly shift pattern and does not work overtime. According to the guidance, Kevin would qualify as an irregular hours worker under the regulations, “if his contract says that the hours he works will be wholly or mostly variable in each pay period”. Paul, on the other hand, would not qualify as an irregular hours worker, because he has fixed hours, albeit worked in a rotating shift pattern (he works 15 hours in week one and 20 hours in week two).
What does this mean in practice? For holiday years commencing on or after 1 April 2024, Kevin’s employer must calculate Kevin’s holiday entitlement and pay in accordance with the new rules: calculating holiday accrual at the rate of 12.07% of hours worked and having the option of paying rolled-up holiday pay at the same rate. Paul, however, remains entitled to 5.6 weeks’ statutory annual leave each holiday year and his holiday pay must be calculated in accordance with the often more complicated “week’s pay” provisions set out in the Employment Rights Act 1996 (in Paul’s case, by calculating average pay over a 52 week reference period, excluding any weeks in which no work was performed and substituting with earlier weeks). In addition to the administrative burden of calculating average pay, it is often the case that this method of calculation results in a higher rate of holiday pay.
The regulations clarify that “a worker is a part-year worker, in relation to a leave year, if, under the terms of their contract, they are required to work only part of that year and there are periods within that year (during the term of the contract) of at least a week which they are not required to work and for which they are not paid.” The guidance uses the example of Melanie, a seasonal worker in the farming industry who only works and gets paid during spring and summer months, as an example of a part-year worker under this definition. According to the guidance, Melanie would qualify as a part-year worker if her contract reflects that there are periods of time that last more than a week when she is not contracted to work and does not receive pay. The guidance uses the example of Ian, who is paid an annualised (flat) salary over 12 months, but has periods of time that last more than one week where he is not working, as an example of a worker who falls outside the definition of part-year worker. According to the guidance, Ian would not qualify as part-year worker if his contract reflects that there are weeks where he is not working and there are no weeks where he does not receive pay; Ian would need to not receive pay during the periods he is not working, in order to be classified as a part-year worker. Again, the practical consequence is that Melanie’s employer must use the new calculation rules for holiday years commencing on or after 1 April 2024, whereas Ian’s employer must continue to follow the existing calculation rules (with Ian being entitled to 5.6 weeks’ statutory annual leave, regardless of what proportion of the holiday year he in fact works).
Many people question whether workers who, like Ian, receive a monthly salary throughout the year, but are only required to work for part of the year, should fall outside the definition of part-year worker. Most school teachers are paid in this way, for example, as are other workers, normally for administrative ease and to assist with managing their finances. As the guidance is non-statutory and the regulations do not clarify this point, we will need to wait for the courts to interpret the definition of a part-year worker under the regulations. The key question for the courts to answer will be whether the worker needs to not receive pay during periods when not working, or whether it is sufficient that the worker is not paid in respect of such non-working periods, albeit their annual pay is averaged over 12 months.
2. Calculating holiday entitlement for irregular hours or part-year workers taking statutory or sick leave
The regulations introduce a method of calculating how much leave an irregular hours worker or part-year worker accrues when they take statutory leave, including maternity or paternity leave, or are off sick. This new method applies to holiday years commencing on or after 1 April 2024.
The regulations require an employer to calculate the average number of hours per week that the worker worked during the relevant period (52 weeks) before the relevant sick or statutory leave. The employer should multiply these average weekly hours by 12.07% to find the number of hours of annual leave that the worker accrues during each week of the sick leave or statutory leave, and then multiply those hours by the number of weeks in the pay period in question. When identifying the average weekly hours, any weeks when the worker was off sick or on statutory leave should be ignored, however, all other weeks during the relevant period should be taken into account, including weeks during which the worker did not work any hours.
Unhelpfully, the guidance shows a worked example which calculates average weekly hours based on a 46.4 week reference period (52 calendar weeks minus 5.6 weeks of statutory annual leave entitlement). However, this method is at apparent odds with the regulations, which clearly state that average weekly hours must be calculated based on a 52 week reference period. Given that the guidance is non-statutory, the method of calculation in the regulations takes precedence.
3. Defining what is considered “normal remuneration”
The regulations confirmed that the following types of payments are to be included when determining the amount of a week’s holiday pay in relation to the four weeks of statutory annual leave deriving from European law:
- Payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract.
- Payments for professional or personal status relating to length of service, seniority or professional qualifications.
- Other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.
There remains ambiguity about whether certain types of payments should be taken into account; for example, bonuses. Arguably, a bonus that is “regularly paid to a worker in the 52 weeks preceding the calculation date”, or even a one-off bonus that is “intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract”, should be included when calculating holiday pay. Many employers hoped that the guidance would provide clarity on this point, but it fails to do so, stating simply that a worker’s normal rate of pay for these purposes, “could include regular payments, such as overtime, regular bonuses and commission.” Again, it looks like we will need to wait for the courts to determine which type of payments are required to be taken into account under the regulations.
Sarah Taylor