Key takeaways

The government is introducing new rules for irregular hours (IH) workers and part-year (PY) workers (see below for definitions). The majority of these new rules apply to leave years starting on or after 1 April 2024. If an employer's leave year is a calendar year, the rules won't apply until 1 January 2025.

The new rules change how such workers accrue holiday entitlement and make it lawful to pay them rolled-up holiday pay at the rate of 12.07%. We think that this will be an attractive option for many employers, and indeed it reflects existing practice in many sectors.

Where employers do not use rolled-up holiday pay for IH and PY workers, it will be particularly important to ensure that their systems comply with new rules on accrual of holiday entitlement. All employers will need to implement the accrual rules in order to comply with the requirement to pay in lieu of unused holiday entitlement on termination, as well as to understand what holiday accrues during periods of sick leave or family-related statutory leave.

The concept of an IH worker could be broader than you might think: the wording of the regulations arguably might include people who are regularly required to work more than their core, fixed hours, although we suspect that is not the intention.

The government has codified existing case law on when holiday entitlement must carry over into the next holiday year and potentially longer. This applies from 1 January 2024.

The government has also codified what elements of pay need to be included in statutory holiday pay and when. This applies from 1 January 2024. Regrettably, the codified rules do not resolve a gap in the existing case law as to whether something like an annual bonus should be included. This seems likely be an area for future litigation.

Challenges: the reforms are being made under powers in the Retained EU Law (Revocation and Reform) Act 2023 (REULA). Those powers are complex, meaning that there might be scope to argue that some of the reforms go further than permitted. Similarly, where there is any ambiguity in the new reforms, it might be possible to argue that they should be interpreted in line with existing case law.

What should employers do? From a compliance perspective, the main thing is to firstly quantify the number of workers in your organisation who would or could be IH or PY workers and, secondly, audit your current holiday pay structures for such workers to ensure compliance with the new rules. For all workers, it would be beneficial to identify all elements of pay and whether they come within the rules of what should be included in holiday pay calculation.

Having verified compliance, employers should consider whether rolled-up holiday pay for IH and PY workers would be preferable to current arrangements. If yes, employers would need to comply with any contractual limitations or consultation requirements relating to moving to a rolled-up system.

Employers should also ensure they have clear "use it or lose it" holiday communications to avoid untaken statutory holiday entitlement carrying over. 

In all respects, we would be happy to advise you on the specific impacts on your organisation, and tailored solutions.

In more detail

Going forward, the key features of the statutory holiday rules in Great Britain will be as follows below. They do not apply in Northern Ireland.

• There will be three categories of worker for holiday purposes: (1) IH workers; (2) PY workers; and (3) all other workers, who we will call regular workers.
   
• IH workers are workers whose contractual hours in each pay period of the leave year are wholly or mostly variable. There is no further explanation as to how to assess variability. For example, would IH status be triggered if a worker's contract stipulates "9 to 5" hours but that they must also work such additional hours as necessary for the proper performance of their duties? Or will tribunals apply another form of test, such as a percentage one? If a worker has two contracts with the employer (for example, a main, permanent contract, and a secondary one for bank work), employers have to look at the arrangements in the round to assess whether they are an IH worker.
   
• PY workers are workers who have a continuous contract (either permanent or fixed) under the terms of which there are periods of at least one week in the year where they are neither paid nor required to work. The reference to periods in the plural suggests there must be at least two such weeks of no work and no pay. A common example of a PY worker is someone who is employed all year long but only works during school terms.
   
• Broadly speaking, regular workers' statutory holiday entitlements remain the same, although additional compliance obligations apply in respect of that holiday (see below).
   
• Amount of holiday and accrual:
  1. Regular workers continue to be entitled to 5.6 weeks' paid holiday in a leave year, with a cap of 28 days. They accrue all their statutory leave at the beginning of the leave year, save for special rules in relation to the first year. As before, the 5.6 weeks remains split into entitlements of four weeks (which corresponded with a worker's rights under the EU's Working Time Directive – "Euro leave") and an additional 1.6 weeks. The distinction remains important for carry-over and pay purposes.
      
  2. IH and PY workers will only be entitled to the holiday that they have accrued at the point in the year that they wish to take it. Accrual occurs at the end of each pay period, and is calculated as 12.07% of the hours they have worked in that pay period. In relation to PY workers, this new system of accrual overturns the outcome of the Supreme Court's decision in Harpur Trust v Brazel (see United Kingdom: Death of 12.07% for holiday pay?). As with regular workers, there is an overall cap of 28 days per leave year. However, there is no explanation of how to convert a holiday entitlement in hours into days, suggesting that employees may be able to take leave in much shorter blocks than days or half days.
      
  3. All workers continue to accrue holiday entitlement when on sick leave or family-related leave. However, under the new rules, IH and PY workers' accrual will be 12.07% of the average weekly hours in the preceding 52 weeks. So, if an IH worker had two weeks' sick leave and had worked 20 hours a week on average in the preceding 52 weeks, they would accrue five hours of holiday in those two weeks of absence. (i.e., 12.07% of 20 hours multiplied by two weeks is 4.83 hours. Fractions that are more than 30 minutes must be rounded-up to the nearest hour.) The accrual would crystalise at the end of the pay period in which the absence occurred. If the absence spanned two pay periods, the accrual would be split accordingly.
      
  4. When calculating the 52 week reference period you ignore any weeks of sickness absence or family-related statutory leave. In that case, you count back further to have 52 countable weeks, but you don't need to go back further than 104 weeks.
      
• Carry over: the government has used its restatement powers under REULA to codify existing case law on carry-over. The government has therefore confirmed that workers carry over holiday where they couldn't take their holiday in a leave year because:

1. They were on family-related statutory leave. This carries over into the next holiday year.
    
2. They were on sick leave. This carries forward and must be taken within 18 months of the end of the leave year in which the entitlement arose. 

Carry-over also occurs where the employer fails to do all of the following, in which case the entitlement carries over until the end of the first full year in which the employer was no longer at fault: 

3. Recognise the right to take holiday or to payment for it.
    
4. Give a reasonable opportunity to take holiday entitlement or encourage the worker to take their holiday entitlement.
    
5. Give a "use it or lose it" warning to a worker in relation to their entitlement. 

• The above carry-over rules apply to the entirety of IH and PY workers' accrued holiday. In relation to regular workers, they only apply to their 4 weeks' Euro leave, except for the family-related statutory leave carry-over provision: this also applies to a regular worker's additional 1.6 weeks' holiday entitlement.
   
• Holiday pay calculation: the government has used its REULA powers to codify existing case law on what elements of pay need to be included when calculating holiday pay. This applies to all statutory holiday for IH and PY workers. For regular workers, it only applies to their four weeks' Euro leave entitlement. The items to be included are:
  1. Payments intrinsically linked to performance of the workers' duties. This expressly includes commission payments. Like existing case law, it is silent on whether something like an annual performance bonus should be included.
      
  2. Payments which have been regularly paid in the preceding 52 weeks. This expressly includes overtime payments. Based on existing case law, we suspect that this means voluntary overtime. Payments for non-guaranteed overtime (overtime where there is no obligation to offer it, but the worker must do it if asked) ought to be covered by the first category of payments, with no requirement of regularity of payment.
      
  3. Payments for professional or personal status relating to length of service, seniority or professional qualifications.

There is no apparent requirement that, to be included, the worker's overall pay must be negatively impacted by the taking of the holiday.  This was in our view an implicit requirement in respect of all payments addressed by existing case law. 

• In relation to regular workers, the fact that the government has retained the differing pay entitlements for Euro leave and additional leave means the issues created by the recent Supreme Court decision in Agnew remain live. For more explanation, and possible solutions, see: United Kingdom: Supreme Court decision leaves unresolved questions on holiday pay calculation.
   
• Rolled-up holiday pay: Existing case law had provided a halfway house: it was technically unlawful to pay rolled-up holiday pay, but a worker would have to give credit for any such payments if they brought a claim; meaning the claim was potentially worthless. Some businesses therefore continued to pay rolled-up holiday pay. The reforms will make this lawful in respect of all IH and PY workers, provided that the rolled-up rate is 12.07%. The rolled-up pay must also be clearly identified on the worker's payslip and be paid at the same time as their normal pay for work done.