The UK Government has tabled new laws from 1 January 2024, which aim to simplify the issues around holiday pay calculation and accrual for 'irregular hours workers' and 'part-year workers' on permanent contracts.
The new provisions in The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 mean that for these workers, the holiday will accrue at 12.07% of hours worked each pay period, capped at 28 days. Holiday pay will be based on average weekly earnings, ignoring unpaid weeks. The model departs from the confusion caused by the recent Supreme Court decision in Harper Trust and provides a simpler accrual model accounting for varying hours.
The new regulations will also allow 'rolled-up' holiday pay for these workers - a 12.07% uplift to regular pay in each period, to overcome previous issues with holiday pay timing.
Dave Chaplin, CEO of ContractorCalculator, welcomed the changes: "These new rules provide much-needed clarity and fairness around holiday pay for contractors, especially those working through umbrella companies. Linking leave entitlements directly to hours worked creates a fair and transparent system."
What confusion do The Employment Rights Regulations 2023 solve?
Considerable impact was caused by the Supreme Court ruling in Harpur Trust v Brazel in July 2022, which threw confusion into the issues around holiday pay for part-time and casual workers. The case concerned a music teacher, Mrs Brazel, whom Harpur Trust engaged on a permanent zero-hours contract. She worked and was paid only during term time.
Previously, Harpur Trust calculated Mrs Brazel's holiday pay by the 'percentage method' - taking 12.07% of her term-time earnings as representing the proportion of statutory holiday entitlement compared to working weeks in a year. But Mrs Brazel argued she was entitled to 5.6 weeks' holiday, calculated based on her average weekly earnings ignoring unpaid weeks, per the Working Time Regulations 1998 (WTR).
The Supreme Court agreed with Mrs Brazel, rejecting pro-rating part-year workers' leave based on hours worked. But this departed from previous widespread understanding and left employers unsure how to calculate holiday pay for those on permanent contracts working irregular hours or only part of the year.
How the new holiday pay regulations provide clarity
The Regulations create more straightforward rules for employers managing irregular and part-year workers.
Applying the 12.07% accrual rate each pay period is more straightforward than the previous unsure position by linking holiday entitlement clearly to hours worked. Allowing rolled-up holiday pay resolves timing issues and administrative burdens for employers managing variable workers and overcomes the complex requirements to make separate holiday payments, determined retrospectively. Certainty is also provided regarding the carry-over of previous leave accrued but not taken.
The new Employment Rights Regulations 2023, effective from 1 January 2024, will:
- Define categories of 'irregular hours' and 'part-year' workers.
- Allow holiday to accrue based on hours worked, capped at 5.6 weeks.
- Base holiday pay on an hourly rate calculated from average weekly pay
- Permit a portion of leave to be carried forward in certain circumstances.
- Critically, allow holiday pay to be 'rolled up' and paid via a 12.07% supplement.
The new Regulations offer simplified holiday pay calculation for irregular hours and part-time staff on permanent contracts. The new rules benefit employers and workers by removing confusion and preventing over or underpayment versus full-timers.
What do the employers need to know – how can they prepare?
The new rules give employers of irregular and part-year workers welcome certainty. The accrual model prevents the risks created by Harper Trust. Rolled-up holiday pay also simplifies administration and costs.
However, firms must still enable leave-taking and communicate the changes. Managers will need training on the new rules to manage accrued leave correctly, and pay slips should show holiday pay figures.
Employers wanting to prepare for the regulations should:
- Review contracts for irregular hours and part-year permanent staff.
- Decide whether to adopt accrual models and rolled-up holiday pay from 1 January 2024
- Ensure payroll systems can manage holiday accrual, rolled-up holiday pay and transitional carry-over of previous leave.
- Calculate potential increased holiday pay costs from the changes.
- Review procedures for holiday requests, record leave taken and manage carry-over.
- Communicate the changes clearly to affected workers.
Taking a proactive approach will ensure holiday pay for irregular and part-year workers is managed fairly, transparently and compliantly from 2024 onwards.
Will the changes affect contractors?
For contractors and freelancers on flexible hours who are working via agencies or umbrella companies, there should be benefits. The link between leave accrual/pay and hours worked should be more transparent and fair, leading to less "holiday pay skimming" by unscrupulous operators in the market.
Rolled-up holiday pay also suits temporary workers paid hourly or daily. However, workers should check their pay slips to ensure the 12.07% supplement is applied correctly.
However, workers must check their pay statements to ensure that 12.07% holiday pay is applied correctly. Historic underpayment issues, like those discussed on BBC's Moneybox, may still arise if rolled-up is implemented poorly.
Chaplin adds: "Enabling holiday pay to be rolled up suits temporary contractors paid by the day or hour via agency payroll or umbrella companies. The changes should help stamp out unlawful withholding of holiday pay that has plagued parts of the contractor payroll sector.
"The reforms finally bring much-needed clarity for contractors, and the outcome should be a fairer system for all."