What are the new rules for calculating holiday pay?

After the festive season and now facing a dark and gloomy January, many workers are looking forward to their next holiday. For many workers, the calculation of holiday leave entitlement and holiday pay is straightforward, but for workers who work irregular hours (zero-hour contracts) or part of the year it has become a thorny subject that has been much litigated.

The Working Time Regulations (WTR) provide that workers are entitled to 5.6 weeks’ annual leave; however, this is split into two distinct “pots” of leave – 4 weeks’ leave as required by the European Working Time Directive (“standard leave”); and 1.6 weeks’ leave which was granted by the UK government to top up minimum holiday leave entitlement (“additional leave”). There are different rules for each pot. For example, standard leave should be paid at normal pay which includes such things as commissions, allowances and some overtime payments but for additional leave, it can be paid at basic pay rate. The Government has made a number of changes to the WTR which are effective from 1 January 2024, but unfortunately it chose not to simplify the rules by amalgamating the pots. Instead, it has retained the two pots and their different calculation methods.

The main changes include:

Employers are no longer required to keep a separate record of the daily working hours of workers so long as they are able to demonstrate compliance with the WTR.

Introducing a method to calculate standard leave entitlement for irregular hour and part-year workers at 12.07% of the number of hours worked in a pay period, up to a maximum of 28 days per year.

Workers only have until 31 March 2024 to carry over any accrued Covid-related standard leave that was accrued before 1 January 2023. The WTR had permitted workers to carry over their standard leave into the following two annual leave years where it was not reasonably practicable to take it during the Covid pandemic.

Introducing a method to work out how much leave an irregular hour or part year worker has accrued when they take maternity or family-related leave or are off sick, where the annual leave entitlement will be proportionate to the number of hours they have actually worked. For a worker on sick leave they will be able to carry over their accrued standard leave for 18 months from the end of the holiday year in which this leave arose and for those on leave due to maternity or family-related leave, accrued standard leave can be carried over for 12 months from the end of the holiday year in which the leave arose.

The changes define what is considered as normal pay in relation to standard leave to make it easier to calculate. This now includes payments that are intrinsically linked to the performance of tasks which a worker is obliged to carry out under their contract, payments for professional and personal status and other payments such as overtime which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

Introducing rolled-up holiday pay as an alternative method to calculate holiday pay for irregular hours and part-year workers. Rolled up pay is where no holiday pay is paid during the period the worker takes their annual leave entitlement but instead their pay is enhanced during periods of work. The default enhancement rate is 12.07% of the worker’s pay.

A copy of the guidance to the new holiday pay rules can be found here.

Holiday pay remains a complex and difficult area for employers and employees alike. It is to be hoped that the amendments simplify matters somewhat. Time will tell.

This blog was written by Anita Vadgama, Partner and solicitor at didlaw.