Response to government consultation on holiday pay following the Supreme Court judgement

The Government has now published its long-awaited response to various consultations as well as a draft statutory instrument (The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023) containing amendments to the law on holiday pay, TUPE and working time.

The key changes, which are to come into force on 01 January 2024, include:

• Introducing ‘rolled-up’ holiday pay for irregular hours and part-year workers;
• Allowing holiday entitlement for irregular hours and part-year workers to accrue at a rate of 12.07% of hours worked;
• Ratifying the right to carry over holiday from one year to another in certain circumstances;
• Clarification of the record-keeping requirements under the Working Time Regulations; and
• Changes to TUPE consultation requirements.

Holiday entitlement and remuneration

In relation to holiday pay, the Government proposes to introduce ‘rolled-up’ holiday pay (a concept that was previously considered unlawful), which enables workers to receive an enhancement to their regular pay in respect of accrued holiday entitlement, instead of being paid when they take annual leave. However, this will only be possible for irregular hours and part-year workers (which may include some agency workers).

The Government will legislate to ensure clarification as to what constitutes “normal” pay for the purposes of holiday pay, include commission payments and other payments, such as regular overtime payments.

The proposals do not, however, introduce a single annual leave entitlement incorporating the four weeks basic annual leave directed by EU law and the 1.6 weeks additional leave under the Working Time Regulations. This does mean that some confusion does remain, but employers who choose to do so, can maintain two rates of holiday pay so that workers continue to receive four weeks at the “normal” rate of pay (including overtime, additional allowances and so on) and 1.6 weeks at the basic rate of pay.

With regard to the Brazel v Harpur Trust ruling (a reminder of the details and implications of that case can be found here), the original suggestion that this might be addressed by introducing a 52-week reference period has been abandoned due to concerns around the administrative burden that this would create, and the issues it would raise for workers whose hours differ year on year and workers in their first year of employment.

Instead, an accrual method to calculate annual leave entitlement has been introduced whereby annual leave accrual will be based on 12.07% of hours worked in a pay period for irregular hours workers and part-year workers in the first year of employment and beyond. This is the same method previously referred to in the ACAS guidance and widely used before the Supreme Court found the approach to be unlawful in the Harpur Trust case. Legislating the 12.07% calculation will be welcomed by employers who employ part-year workers as a more proportionate approach to holiday pay and entitlement.

The response confirms that the Government will go ahead with the proposed change to the record-keeping requirements under the WTR. This will make clear that employers do not have to keep a record of workers’ daily working hours and must only ensure adequate proportionate records in the context of a given workplace and particular working patterns.

The proposals also include the ratification of various pieces of retained EU case law that the Government considers necessary to retain workers’ overall level of protection and entitlement, in relation to the carry-over of annual leave when a worker is unable to take their leave due to being on maternity/family-related leave or sick leave. It will also introduce a method of accrual of annual leave for irregular hours and part-year workers when they have had other periods of maternity/family related leave or sick leave.

TUPE

With regards to TUPE, the Government has confirmed its proposal to change the consultation obligations that apply to TUPE transfers to make these less onerous for organisations with fewer than 50 employees.

Going forwards, all small organisations will be permitted to consult directly with employees if there are no existing employee representatives in place (such as trade unions), rather than having to go through the process of arranging elections for new employee representatives; and employers of any size will be permitted to consult directly with employees (provided no existing employee representatives are in place) where the transfer affects fewer than ten employees.

Next steps

The changes to holiday pay and entitlement are going to have the most impact on employers who use atypical working arrangements, such as term time only working in the education sector in particular. It is advisable for these types of employers to begin to look at their current arrangements now, with a view to implementing changes in the new year.  In some cases, employers may need to collectively consult with staff and seek agreement to implement the changes, particularly where employers have already taken steps to comply with the findings of Harpur Trust and now may wish to reverse those changes in light of the proposals.

If you would like further guidance relating to the outcome of this consultation, or would like to discuss any other matters, please visit our Employment page or contact our team below.

Please note that this information is for general guidance only and should not substitute professional legal advice. If you have specific concerns, we recommend consulting one of our legal experts.