Important changes to the law on holiday pay

Important changes to the law on holiday pay

**News Alert** IR35 reform postponed to 2021

The Department for Business and Trade recently published their response to the consultation on reforms to retained EU employment law and the consultation on calculating holiday entitlement for part-year and irregular hours workers. In addition, draft legislation has been published in the form of the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 and The Equality Act 2010 (Amendment) Regulations 2023.

The reason for this flurry of new draft legislation is that, from 1 January 2024, the Retained EU Law (Revocation and Reform) Act 2023 (the REUL act) means that general EU interpretive principles are removed, creating a risk that the case law covering certain critical workers’ rights would fall away. In particular, this impacts on holiday-related rights.

The changes to employment law that will flow from this draft legislation are significant. We have provided a short summary of the key implications on worker’s rights to holiday below. See our other updates for the implications of the Equality Act 2010 (Amendment) Regulations 2023 and changes to the TUPE regulations.

Rate of holiday pay

A significant number of European cases over the last 12 years have focused on workers’ rights to holiday. One of the most controversial aspects of these cases was the principal that employees should receive “normal remuneration” including commission and regular overtime during any period of the four weeks’ European based holiday. The government considers that the REUL act creates a risk that the case law defining what should be included in “normal remuneration” would fall away. Therefore, they have inserted in the draft regulations, some of the case law wording formulating what constitutes “normal remuneration”.

Specifically, the draft regulations provide that the following types of payment are to be included when calculating holiday:

  • 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

This wording still leaves the uncertainties that were present in the EU case law and introduces perhaps more uncertainty. Although the Explanatory Memorandum to the draft legislation says that normal remuneration is “generally understood to include certain types of bonuses and commission”, it remains unclear which payments are covered by this wording. In particular, it is unclear whether an annual discretionary bonus would be covered by this new wording.

Calculating holiday entitlement for part-year and irregular hours workers

Over the last few years, there has been confusion over the accrual of holiday for part-year and irregular hours workers. The common practice of using 12.07% to calculate holiday entitlement has been found to be unlawful in the UK courts, who have held that all workers are entitled to 5.6 weeks’ holiday, even if they work for only part of the year. The current mechanism in the Working Time Regulations is very complicated and leads to anomalous results for some workers.

The government has decided to legislate to seek to simply this position. Under the draft regulations, part-year and irregular hours workers will, for holiday years beginning on or after 1 April 2024, accrue holiday at 12.07% of the number of hours they have worked in each pay period.

Introducing rolled up holiday pay

In tandem with the new accrual rate in respect of holiday entitlement of 12.07%, the government is legislating to overrule an ECJ case that held that rolled up holiday pay was unlawful. The draft regulations give the right for employers to legally use rolled up holiday pay for irregular hour workers and part year workers. Holiday pay for such workers may be paid by way of a 12.07% uplift to the worker’s remuneration for the work done. The draft regulations specify that any itemised pay statement provided by the employer must indicate the amount of holiday pay that has been paid in respect of the relevant period.

This clarification will come as a great relief for many employers who employ irregular hour and part-year workers.

Questions remain on how employers ensure that workers take this holiday, as it is generally accepted that rolled up holiday pay disincentivises workers from actually taking annual leave.

Carry-forward of holiday

The draft regulations include a codification of the rights to carry-over of holiday that we have seen in European case law over the last few years. The draft regulations make it clear that workers can carry forward holiday into the following holiday year where they are unable to take that holiday in the following circumstances:

  • Statutory leave (including maternity, paternity, adoption leave etc)
  • Sick leave – that holiday may be carried forward for 18 months
  • Their employer has failed to recognise their right to annual holiday or payment for that holiday
  • Their employer has failed to give them a reasonable opportunity to take that holiday or encourage them to do so
  • Their employer has failed to inform them that any holiday not taken at the end of the holiday year, which cannot be carried forward, will be lost

The first of these two rights to carry over are quite well known – those on maternity leave or long-term sick leave are generally aware that they can carry forward untaken holiday. However, the last three categories are relatively recent concepts and considerably more nebulous – for example, how far does an employer have to go to “encourage” a worker to take holiday. It seems likely that putting these EU law principles specifically into UK legislation may lead to more litigation on these points. 

Record keeping requirements under the Working Time Regulations

The government consultation considered a European case that held that employers must keep a record of all daily working hours for their workers. This requirement was considered by the government to be unnecessary and so the draft regulations include a specific confirmation that employers need not record their workers’ daily working hours. However, the current record keeping requirements under the Working Time Regulations remain, so employers must still keep adequate records to demonstrate:

  • Compliance with the maximum weekly working time
  • Length of night work, and
  • Health assessments and transfers of night workers to day work.

Creating a single annual leave entitlement

The government consulted on whether they should amalgamate the two different types of annual leave (four weeks’ European based holiday and 1.6 weeks domestic holiday). They decided that they would retain the two distinct pots of annual holiday and so workers will continue to be entitled to receive four weeks’ holiday based on “normal remuneration” and 1.6 weeks’ holiday at the basic rate of pay.


This draft statutory instrument is designed to come into force on 1 January 2024. It is likely that any claims arising from these changes will not be heard in the employment tribunal for a year or two. It remains unclear how the tribunals and courts will interpret the draft regulations, if they are not required to consider the EU case law that sits behind these principles.

The fact that these principles will now be codified within our UK law and the publicity that goes along with this introduction is likely to mean more challenges from workers on these issues and a higher risk of litigation. We would recommend that employers take this opportunity now to carry out a review of their holiday pay practice/policies and to review their contracts with irregular hour workers and part-year workers.

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