We’re all going on a summer holiday… and getting paid properly for it

Posted: 19/07/2024

As the summer holidays are almost upon us, it seems a good time to refresh our memories on the changes to holiday pay brought in by the amendments to the Working Time Regulations 1998 (WTR), with effect from 1 January 2024. These amendments followed an eventful few years in holiday pay case law, and sought to codify existing EU-derived law, as well as bring about much needed reform, particularly for those without regular working hours.  

This article highlights two key changes that employers need to make sure they are aware of, and will look at some areas of uncertainty that remain, despite the amendments to the legislation.  

Part year and irregular hours workers 

One of the most welcome changes in the legislation has been the reform of the law that had been in place since the Supreme Court’s 2022 judgment in the case of Harpur Trust v Brazel. The method of calculating holiday pay for workers, such as the peripatetic music teacher in that case, was deeply unsatisfactory for employers. A week of holiday pay had to be based on a week’s salary, looking back over a 52-week reference period. However, only weeks where work had been carried out had to be taken into account. This resulted in disproportionately large holiday payments to such workers and headaches for employers when working out how to calculate holiday payments properly.  

For workers who are now defined as ‘part year’ and/or ‘irregular hours’, holiday will accrue a month in arrears at the rate of 12.07% for every hour of work done. Employers and workers can therefore be clear on the amount of holiday that is accrued at the end of each month, rather than having to try to calculate this in advance, where hours may vary over that period. As for how to pay the holiday, workers may book and take holiday as normal. However, the practice of rolling up holiday pay is finally lawful for such employees, and this may be done as an alternative. Any rolled-up pay must be clearly defined on the payslip.  

Key to whether these rules can be used by employers will be whether workers can properly be described as ‘irregular hours’ and/or ‘part year’ workers. Irregular hours workers are those whose hours of work in each pay period (ie the normal period of pay, which for most will be monthly) is, under the terms of their contract, wholly or mainly variable. It is not completely clear which workers this applies to. It seems obvious that zero hours workers’ working hours will be wholly variable. However, does ‘mainly variable’ mean that the majority of hours are variable, and does there need to be variation in every pay period, most, or just some? It therefore remains a little unclear how tribunals will assess whether someone is an irregular hours worker. 

Part year workers are workers who are required to work only part of the year and where there is a period of at least a week in that year where they are not required to work, and for which they are not paid. The government’s initial guidance was confusing and stated that someone on an annualised hours contract (ie someone who was paid every month but had periods of non-work, for example, a term-time only worker) would not fall within this category. This appeared to defeat what everyone understood to be the object of the amendment in the legislation, ie to rectify the injustice of the Brazel case. Much to the relief of many employers, the guidance now clarifies that such workers will fall within that definition. 

Employers should bear in mind that the above rules only apply for holiday years that started on or after 1 April 2024 so, for some employers, there could be a number of months to wait before these new provisions can be utilised. Where the new holiday year has not yet started, employers should be considering any changes needed to their contracts and employee handbooks in readiness. Until that time, they should continue to apply a Brazel-compliant method of calculating holiday pay. 

What to include in holiday pay calculations 

Employers should be aware that the amendments to the WTR codified developments over recent years of case law, on precisely what should be paid by way of holiday pay. The basic position is that an employee should receive their normal remuneration, so they are not disincentivised from taking annual leave.  

The detail of law is of course more nuanced and open to interpretation than that. The amended WTR provide that, for Regulation 13 leave (the EU-derived leave of 20 days) and for the new Regulation 15B leave (the full allowance of leave accrued by part year and irregular hours workers), the following should be included when calculating a week’s pay:

• payments that are intrinsically linked to the performance of tasks under the contract. This clearly covers regular salary, and is now specifically stated to include commission payments. It will also include regular allowances and other payments such as on call allowances and shift premia;  
• payments for professional or personal status relating to length of service, seniority or professional qualification; and  
• other payments, such as overtime payments which the employee has regularly received.  

There are still some areas of uncertainty in the legislation. While commission payments are clearly within scope, the WTR makes no mention of annual bonuses. A worker should not be disadvantaged by taking annual leave, so it makes perfect sense for them to receive all payments to which they would be entitled in a normal working week. It is therefore a strong argument that there is no need to include annual bonus payments – they will get these anyway, and they do not impact on normal weekly pay. 

The guidance rather unhelpfully advises that: ‘Whether bonuses are included in normal holiday pay depends on the nature of the bonus.’ This may suggest that productivity bonuses linked to worker performance are more likely to be included in holiday pay than an annual Christmas bonus, but we will need to wait for further clarification through amended guidance or case law. In the meantime, employers must decide whether to take a cautious approach, or deal more robustly with this point. 

For ‘regular’ (ie those who are not part-year or irregular hours) workers, it is theoretically possible to pay only basic pay for the eight additional days of UK-derived leave. If employers choose to do this, it should be clarified in a contract or handbook which type of leave is going to be used first. However, many employers will shy away from this as it can create difficulties in the payroll system in calculating and paying holiday pay. It also creates a difference of treatment between ‘regular’ and irregular hours/part year workers. Although that is not a legal issue, there is certainly a question over whether employers will want to treat employees differently.  

A to-do list for the summer holiday 

Employers can make sure they are compliant with holiday pay legislation by:

• ensuring they are clear on whether workers are ‘regular’, or part year/irregular hours, so they can deal with holiday pay in the right way for each person;  
• preparing for the new holiday year – if it has not started already – by making any changes needed to part year/irregular hours contracts, staff handbooks, and any internal guidance notes; and
• checking holiday pay calculations to ensure staff really are getting pay that reflects their usual pay slips when working. 

In addition, employers should make sure they are up to speed on the other changes brought in by the amendments to the WTR, which will become more relevant as the end of the current holiday year approaches, including: 

• checking their policies and procedures are correct about new rules on the carry-over of leave, particularly for those on sick leave or absent for family-related reasons, and making sure workers are aware of their rights to carry over leave; and
• making sure any ‘use it or lose it’ policy is well known by staff; otherwise, there is a risk that it may not be enforceable – mentioning this once or burying it in the staff handbook is unlikely to be sufficient, so consider how the information can be shared clearly. 

Return to news headlines