Calculating holiday entitlement can at times, be challenging, especially when the rules around the method that is to be used, changes.
You may recall, in 2022 the Supreme Court of the UK confirmed that part-year workers would be entitled to 5.6 weeks holiday for the year (even though some of these workers don’t work a full year), following the Harpur Trust v Brazel case.
Legislative intervention to simplify holiday entitlement calculations has been required ever since and many employers will be pleased to know that with effect from 1st January 2024, this has arrived!
The new changes will be greatly received by many industries, including (but not limited to) hospitality, retail and education. The changes will relate to those on irregular hours and/or work just part of the year, for holiday years that commence on or after 1st April 2024. This means that businesses with holiday years running from January this year, will have some extra time to prepare for the changes.
We have included a summary of the main changes below.
1. Holiday entitlement for irregular hours employees and part-year employees will accrue at 12.07% of hours.
The Supreme Court of the UK's 2022 decision for the Harpur Trust v Brazel case, meant that employers had to change the way they had been calculating holiday entitlement for some term-time employees, zero-hours employees and other employees with irregular hours. The Court held that the 5.6 week holiday entitlement could not be pro-rated for part-year employees.
The Government has now decided to introduce a new method for calculating holiday entitlement for irregular hours and part-year employees.
For holiday years beginning on or after 1 April 2024, holiday entitlement will be calculated using an accrual method throughout the holiday year.
Holiday entitlement will accrue at 12.07% of hours worked in a pay period, rounded up to the nearest hour. For example, if a monthly paid worker works 100 hours in a month, they will have accrued 12 hours of annual leave. This provides clarity but also, considerably reduces the administrative burden on employers that resulted from the Supreme Court’s decision in the Harpur Trust v Brazel case.
2. Rolled-up holiday pay will be allowed for irregular hours employees and part- year employees.
Rolled-up holiday is when an additional amount is paid for holiday pay, along with basic pay instead of making a payment at the time holiday is taken.
The amendment under the new Regulations applies only for irregular hours employees and part-year employees. It will not be compulsory for employers to implement rolled-up holiday pay, but they can choose to do so, if they wish.
If an employer does choose to use rolled-up holiday pay, it must calculate it at 12.07% of the worker's earnings during the pay period. It is not paid when the leave is taken, and the worker's pay slip must itemise how much holiday pay they have been paid for the period, and not merging the 2 pay rates together. The accrual rate is 12.07% because this is the statutory annual leave entitlement (5.6 weeks) expressed as a percentage of the number of potential working weeks in a year (46.4 weeks). If an employer offers more holiday entitlement than the statutory minimum of 5.6 weeks per year, the percentage will need to be increased accordingly.
3. Employees on family-related leave must be allowed to carry over holiday.
The Regulations specify that employees must be allowed to carry holiday forward into the next holiday year if they have not taken it because they were on family leave (maternity, adoption, shared parental, ordinary parental, paternity or parental bereavement).
Most employers will already have been doing this, in accordance with previous case law.
This requirement applies to the whole 5.6 weeks' annual leave entitlement.
4. Employees on long-term sick leave must be allowed to carry over holiday.
The Regulations also require annual leave to be carried over where a worker has been unable to take their leave, due to a period of long-term sickness absence.
To avoid employees accruing large amounts of holiday to be taken on their return from sickness absence, or if their employment ends paid in lieu at the end of their employment, the Regulations state that the carried forward holiday entitlement must be taken within 18 months of the end of the holiday year in which it accrued.
This applies only to the carry-over of four weeks' annual leave entitlement derived from EU law.
5. Employees who have not had a reasonable opportunity to take holiday must be allowed to carry it over.
There will be a positive duty for employers to encourage employees to take their full holiday entitlement, as a result of new provisions.
Employees will be entitled to carry over untaken annual leave where the employer has not:
recognised their right to paid statutory annual leave;
given them a reasonable opportunity to take the leave;
encouraged them to take the leave; or
adequately informed them that any untaken leave that cannot be carried forward will be lost at the end of the holiday year.
This carry-over requirement applies only to the four weeks' annual leave entitlement derived from EU law.
Employers should make sure they can monitor whether employees are taking their holiday, and to encourage them to take it where necessary.
6. Normal pay for the purposes of calculating holiday pay includes overtime and commission.
The Regulations set out the elements of pay that are to be included when establishing an employee’s "normal" rate of pay for the purposes of calculating holiday pay.
According to the Regulations, normal pay includes:
salary payments, including commission payments, that are intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out;
payments for professional or personal status relating to length of service, seniority or professional qualifications; and
payments for overtime, that have been regularly paid to a worker in the 52 weeks preceding the calculation date.
The above should be considered when paying holiday at the rate of 12.07%, the calculation being the number of hours worked x 12.07% = Z. Z x average hourly rate over the previous 52 weeks to consider the ‘normal pay’.
Holiday entitlement calculations can still be a minefield for some, contact the experts at ForrestHR for support and to discuss in more detail how these changes will affect your business.