Holiday pay 2024: a return to coherency (or so we hope, at least for a while)

The world of holiday entitlement (and pay) has been a very uncertain environment following a spate of EU and domestic judgments that interpreted holiday entitlement under the Working Time Regulations 1998 (WTR) in ways that were unlikely to have ever been envisaged by the nation’s legislators or employers. In short, it has been a rollercoaster ride, one which may (finally) be reaching its conclusion.

Background

The WTR ushered in a new regime of four weeks’ statutory holiday to all workers, thanks to the UK’s membership of the European Union. This entitlement was subsequently gold-plated by the UK Government by the introduction of 1.6 weeks’ additional statutory entitlement in 2007 – making up the 5.6 weeks’ entitlement we have today.

Since 2011, however, we have had a slew of legal challenges to the interpretation of statutory holiday entitlement, which has seen the apparently simple concept of a ‘week’s pay’ include first flight allowances, then commission and then overtime in the calculation.

In July 2022, 24 years after the WTR were introduced, the Supreme Court confirmed in Harpur Trust that part-year workers are entitled to a gilded enhancement of 5.6 weeks holiday pay paid at actual pay received whilst working, despite such workers not actually working for 13, or more, weeks of the year. As if the position could not be more adverse to employers, the 25th anniversary of the WTR this year saw the Supreme Court confirm in the recent case of Agnew that a three-month gap did not break a series of unlawful deductions from wages, potentially increasing the amount of back-pay that could be claimed.

It has been clear for some time that legislative intervention was required to clarify the position. Such change has been promised since the Government first consulted on proposals to change the calculation of annual leave entitlement following Harpur Trust, which was followed by a further consultation in May 2023 on ways to simplify the WTR, not least due to the need to determine what parts of the WTR should be retained following Brexit and the retained EU Law (Revocation and Reform) Act 2023.

Announced and published changes

The Government, with uncharacteristic fleet of foot, on 8 November 2023 announced its response to the two public consultations on statutory holiday entitlement reform and published the regulations that will be introduced to implement its proposed reforms. Those regulations will come into force on 1 January 2024.

What key changes will come into effect

• There will be new defined categories of ‘irregular hours workers’ and ‘part year workers’, the former encompassing those whose contractual hours are wholly or mostly variable. The latter will apply to workers whose contracted hours require them to work part of the year only, with periods of the year during which they are not required to work and for which they are unpaid. This will include term time only and peripatetic workers commonly engaged within the education sector. Both categories of workers will be entitled to accrue 5.6 weeks holiday each year, from the commencement of employment, at the rate of 12.07% of the number of hours they have worked in the preceding pay period. In short, it will be possible to pro-rate holiday entitlement for term time only workers to reflect the weeks per year that they actually work.
• Employers will be able to pay rolled up holiday pay to irregular hours workers and part year workers, at the rate of 12.07% of the number of hours worked in the preceding pay period, provided that the worker’s pay statement itemises the holiday pay paid.
• The regulations will clarify that holiday pay for the four weeks of ‘EU’ derived holiday only, will include:
  • Payments intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out, such as commission
  • Payments for professional or personal status relating to length of service, seniority or professional qualifications
  • Payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation.
• Confirmation that payment for the additional holiday entitlement of 1.6 weeks will continue to be based on basic pay only (unless the employer opts to pay the same rate in respect of the full statutory holiday entitlement).
• Certainty to ensure irregular hours workers and part-year workers know how much leave has been accrued when they are on maternity/family-related leave (which will be defined as ‘statutory leave’) or sick leave, with a 52-week reference period which will allow employers to look back and work out an average of hours worked across that period. Employers will need to include weeks not worked and not on statutory leave in the calculation, so it is proportionate to the time actually worked. When calculating holiday pay, an employer could use the current 52 weeks reference period for holiday pay however, weeks when a worker was not working should be excluded.

These changes herald the biggest transformation of statutory holiday provision since 1998 and should be welcomed by education institutions as providing much needed clarity on the holiday entitlement of their workforce – particularly in respect of term time only and peripatetic workers.

The new Regulations are expected to come into effect on 1 January 2024, although note that the provisions applicable to irregular and part year workers will only apply to leave years starting on or after 1 April 2024. It is hoped these changes will put to bed the uncertainty caused by the decisions in Harpur Trust and Agnew. Unfortunately, there will still be time for claims to accrue based on those two decisions, so we are not out of the woods just yet, but the future is at least looking clearer.

If you would like any further information on the contents of this article, please contact Abigail Trencher. For help with devising your strategy for implementing any changes to your contractual documentation and managing risk (particularly if you implemented changes following Harpur Trust) please contact a member of our Education Employment Team.