In the UK the right to paid annual leave is governed by the Working Time Regulations 1998 (WTR), which were themselves derived from the EU Working Time Directive.
Since these regulations were drafted, the labour market has significantly evolved, particularly in terms of the growth of atypical and flexible working and the emergence of the gig economy, working arrangements which the WTR’s do not easily accommodate. In addition, there has been a large body of case law emanating from the European Court of Justice (ECJ) which has been at odds with the WTR’s, resulting in uncertainty for employers and employees regarding how the regulations will be interpreted by Employment Tribunals in any particular case.
The draft Employment Rights (Amendment, Revocation and Transactional Provision) Regulations 2023 are a response to these issues, and have now been passed by both Houses of Parliament. If passed by the joint committee on statutory instruments, which seems highly likely, they will come into force on 1 January 2024. The provisions they contain governing annual leave (detailed below) will apply to workers in respect of any leave year beginning from on or after 1 April 2024.
One initial point to note is that the Government has decided to keep the distinction between the “core” 4 weeks of annual leave (directly derived from EU legislation) and the additional 1.6 weeks added via domestic legislation, and the differences in treatment currently in place between the two.
So what are the main changes?
The elements of pay which must be included in holiday pay
The regulations adopt a body of EU case law which has developed over the last 10 years regarding the elements of pay which need to be included in holiday pay (for the core 4 weeks of statutory annual leave), which must include:
- commission payments which are intrinsically linked to the performance of tasks which the 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 the worker in the 52 weeks preceding the calculation date (not taking into account any weeks in which no remuneration was payable, and adding on further weeks to make up the 52)
Employers who are not currently including such payments in holiday pay are advised to rectify the position as soon as possible.
The right to carry over annual leave following a period of statutory or sick leave
The legislation adopts the position enshrined in EU case law that a worker who is unable to take annual leave because of a period of sick leave, will be able to carry that unused leave forward into the following leave year, provided it is taken by the end of the period of 18 months from the end of the leave year in which it accrued. This applies only to the core 4 weeks of statutory leave.
If a worker is unable to take leave due to a period of statutory family leave (maternity, paternity, adoption, shared parental, parental and parental bereavement leave) they will be able to carry over the unused leave into the next holiday leave year. This applies to all 5.6 weeks of statutory leave (ie, core and additional).
The right to carry over annual leave if the worker has been denied the right to annual leave, not been given a reasonable opportunity or encouraged to take the leave, or not been informed that any leave left untaken at the end of the leave year would be lost
The new legislation gives workers the right to carry over annual leave in these circumstances for a period of up to 1 year beyond the end of the first full leave year in which the above does not apply (i.e. once the practice has been rectified for a full leave year). This only applies to the 4 core weeks of statutory leave.
Irregular and part-year workers
A number of important changes have been introduced with regard to part-year and irregular hours workers.
A worker is a part-year worker if, in relation to a leave year, under the terms of their contract they are required to work only part of that year, and there are periods within that year of at least a week which they are not required to work and for which they are not paid.
A worker is an irregular hours worker if, in relation to a leave year, the number of paid hours that they will work in each pay period during the term of their contract is wholly or mostly variable.
The changes affecting these workers are outlined below:
Accrual of leave
The 2022 Supreme Court decision in Harpur Trust v Brazel had stated that irregular and part-year workers were entitled to the full 5.6 weeks of annual leave, and that it was unlawful for employers to ‘pro-rata’ their entitlement on the basis of 12.07% of hours worked, as had commonly been the practice (12.07% being equivalent to 5.6/46.4, where 5.6 is the minimum statutory holiday entitlement and 46.4 weeks is the annual number of weeks worked, excluding holiday). This caused significant problems for HR professionals and employers as it appeared to lead to unfair results, with part-year or irregular workers who were engaged on a continuous contract effectively getting more annual leave, proportionate to the amount of time they worked, than their counterparts on contracts with regular hours.
The new legislation allows for the return of the 12.07% accrual system. Part-year and irregular workers will now accrue leave at the end of each pay period, based on 12.07% of the hours they work during that period. The total amount of leave per year is capped at 28 days (although it is unclear how this will be calculated given that irregular hours workers, by their nature, do not have a set number of hours per day).
Where a part-year or irregular hours worker is on sick leave or statutory leave, their annual leave will accrue at the rate of 12.07% of their average weekly hours in the period of 52 weeks prior to their leave commencing (or their average hours over their whole period of employment if less than 52 weeks). For this purpose, weeks during which the worker was, for any amount of time, on sick or statutory leave, must be excluded, but all other weeks are included, including any during which they earned no remuneration.
Rolled-up holiday pay
It will be permissible for employers to pay holiday pay to such workers as a 12.07% uplift to normal pay each pay period, rather than when leave is actually taken. This practice of ‘rolling-up’ holiday pay had previously been ruled unlawful by the ECJ. Rolled up holiday pay is still unlawful for all other types of worker.
It is important to note that whilst the legislation only refers to 12.07%, this will only be the case where an employee’s holiday entitlement equates to the minimum statutory holiday entitlement of 5.6 weeks. Where a worker is contractually entitled to more than 5.6 weeks, or where equivalent regular hours workers are entitled to more than 5.6 weeks, the percentage uplift will need to be increased accordingly.
It should be noted that where the employer pays rolled-up holiday pay, they still have an obligation to ensure that workers actually take leave. It will be interesting to see how this is applied and enforced in practice.
Calculation of holiday pay if not ‘rolled-up’
Where employers choose not to adopt ‘rolled-up’ holiday pay, holiday pay must be calculated on the basis of the following:
A is the average weekly pay over the previous 52 weeks, disregarding any weeks in which the worker received no pay, and adding on further weeks to make up the 52 (up to a maximum of 104 weeks)
B is the average number of hours worked by the worker in each week used to calculate A
What else has changed?
In transfers involving the transfer of fewer than 10 employees (regardless of the size of the employer) or where the transferor employs fewer than 50 employees overall, the transferor will be able to consult directly with affected employees rather than elected employee representatives.
Working Time record-keeping
When it comes to keeping records associated with the WTR, the employee is only required to keep adequate records to show whether it has complied with its limits regarding working time, and can do so in such manner and format is it reasonably thinks fit.
If you’re an employer and require assistance in implementing these changes, or have any other HR, Employment Law or Health, Safety & Wellbeing issue you would like to discuss, please do not hesitate to contact us on 01942 727200 and speak to one of our consultants for an initial consultation without charge or obligation.