Roll up, roll up – Holiday pay rules set to change

Following two government consultations on holiday pay in 2023 draft legislation has now been published to change the rules.  The current law has been in place since the advent of the Working Time Regulations in 1998 but due to Brexit and the Supreme Court decision in Harpur v Brazel, which caused considerable confusion in practical terms, there has been a need for clarification particularly on the issue for temporary workers including agency workers. 

Irregular hours and part year workers

The draft rules contain two new concepts, irregular-hours workers and part-year workers. These workers are allowed to be paid on a rolled-up basis, that is inclusion of payment (on account of holiday entitlement) in advance with the normal pay packet. The value of the advance/rolled-up payment is calculated as 12.07% of qualifying pay which includes commission.

There is no actual provision for agency workers as such. So where the employer wants to pay on a rolled-up basis it must first decide whether the worker is an irregular hours or part-year worker. This may not be easy in the case of agency workers whose periods of work or work arrangements depend on assignment on a case-by-case basis. Care will need to be taken in any case where the plan would be to pay on a rolled-up basis. This will be important for those umbrella companies that traditionally have paid on a rolled-up basis.

It is worth noting at this stage that technically the rolled-up holiday pay method has always been unlawful as it contravenes the Working Time Regulations. However, the courts have consistently held that a worker, who has been correctly and transparently paid on a rolled-up basis, suffers no actual loss. Therefore, whilst such a worker has a claim, the claim has no value. As a result, some employers have felt comfortable in paying on a rolled-up basis.

The rules also address the much complained about practice by some businesses of retaining holiday pay amounts if the holiday is not taken by the worker during the holiday year. The ‘use it or lose it’ rule still applies but now this is subject to steps being taken by the employer to encourage leave to be taken. Now it will generally be unlawful to retain sums save where those steps are taken, therefore providing much-needed protection for workers.

What about other kinds of worker?

Workers who are not classified as irregular or part-year are not allowed to be paid on a rolled-up basis and the historical rules continue to apply subject to the new rules about carrying over unused holiday as mentioned above. As the new regulations do not impose any additional liability on a non-compliant employer it remains to be seen what the outcome would be if an employer pays these kinds of workers on a rolled-up basis. Will the courts continue to maintain that a claim technically can be made but still has no value? Are the courts more likely to not recognise sums already paid and require the worker to be paid again? These questions remain to be answered.

What to do now

Whilst the legislation is effective from 1^st January 2024, the good news is that it will only apply in respect of holiday years that commences on or after 1^st April, so there is a reasonable amount of time to prepare processes if they apply to arrangements that you currently, or plan to, have in place for making payment on a rolled-up basis.

In that case, we recommend that you get to grips with the new rules sooner rather than later. The information above is merely a summary of the position and the rules are quite complicated with questions remaining unanswered. In particular, the provisions around who is an irregular or part-year worker are not straightforward, nor are the rules around carrying forward untaken leave which apply to all workers.

For more information on the changes to the holiday pay rules, contact us on 01273 236 236 or email [email protected].