Reintroducing rolled up holiday pay: The practical steps you & your business can take

In November, the government published the draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (the draft regulations), and are due to come into force on 1 January 2024. They contain some meaningful changes to employment legislation, the most impactful of which is making rolled up holiday pay – the traditional 12.07% calculation – a lawful way to pay irregular hours workers for any accrued holiday.

Though the news will be welcomed by many, after frustration following the Harpur Trust v Brazel decision, it has left many employers scratching their heads about how to enact these changes to holiday pay in practical terms. In this article, we set out some key ‘what, whens and hows’ for employers considering how to calculate and pay holiday going forward.

What is changing?

The draft regulations will allow a new system of holiday accrual for irregular hours and part-year workers. In the case of Harpur Trust v Brazel, the Supreme Court confirmed that pro-rating holiday pay for part-year or irregular hours workers using the popular 12.07% method was not permitted under the Working Time Regulations 1998 (the WTR). This ruling caused a great deal of frustration for employers, largely because it led to artificially-inflated holiday pay for part-year workers.

The draft regulations have addressed this issue by amending the WTR so that they will – to the relief of many – permit employers to pay rolled up holiday pay using the traditional 12.07% calculation for irregular hours and part-year workers.

To summarise, holiday entitlements will change as follows:

• holiday will be calculated in hours, not weeks
• holiday will accrue on the last day of the pay period, at a rate of 12.07% of the actual hours worked by the employee in that pay period
• during sick leave or other statutory leave, holiday will accrue using an average over a 52-week reference period.

What this means for employers is that, when paying holiday pay to irregular hours or part-year workers, they will be able to choose between:

1. Paying holiday pay when holiday is taken, calculated at the rate of a week’s pay per a week’s holiday using the above 52-week calculation; or
2. Paying rolled up holiday pay as a 12.07% uplift to the worker’s remuneration for work done in each pay period, then not paying workers at the time that they take their holiday.

When is it changing?

These changes to the way holiday is calculated, accrued and paid will come into effect from the start of an employer’s first holiday year following 1 April 2024.

So, if your holiday year runs from April to March, you could revert to rolled up holiday pay from 1 April next year. However, if your holiday year runs from January to December, you can only revert to rolled up holiday pay from 1 January 2025.

How can employers implement changes?

Although statute will soon allow new methods of holiday pay calculation to be used, there are some key considerations for employers before enacting any changes.

To ensure that any changes are made fairly, and lawfully, we would suggest the following steps:

STEP 1: What do you want to change?

Consider what the current method of calculating and paying holiday pay is, and whether you wish to change it.

STEP 2: What is the current legal position?

Check whether the relevant employees’ contracts of employment and any previous correspondence with employees about the calculation of holiday pay would make the current method of calculation a contractual term.  If it does, you should check whether a change to the calculation would be permitted by the contract.

STEP 3: Enact the change

If the current method of calculating and paying holiday is not a contractual term, or the contract allows a change in the method to be varied, it will likely be quite low risk to change the method from the beginning of the holiday year after 1 April 2024.  However, given that this is a complex and quickly developing area, we would suggest you seek advice to confirm your position and advise on the appropriate steps before implementing any changes.

If the current method of paying holiday is a contractual term, you will need to consult with the employees in the same way you would for any other change in terms and conditions with a view to obtaining their agreement to the changes. At the end of the consultation, you will have the following options:

• employees agree the changes – change the contract of employment and proceed with the changes.
• employees do not agree the changes:
  • unilaterally impose the change; or
  • terminate the employees’ employment and offering re-employment on the new terms, commonly known as ‘fire and re-hire’.

These approaches come with varying levels of risk, and the appropriate process will be very fact-dependent. Before imposing any changes, we advise that you get detailed legal advice to ensure that you are making changes in a fully compliant way.

If your business requires any support on this or any other matter, our team of employment lawyers can help.

Our Legal 500-rated employment law team are experts in guiding businesses of all sizes and backgrounds through a range of issues that may arise.