Government outlines planned changes to holiday entitlement and pay post-Brexit

Rolled up holiday pay will be allowed, and changes will be made to holiday entitlements and requirements on recording working hours under plans announced by the government. We look at the proposals and what they mean for employers.

The plans, which are set out in the ‘Smarter Regulation to Grow the Economy’ policy paper and the Retained EU employment law reforms consultation paper, give an initial indication of how the government intends to reform the rules around holiday entitlement and pay post-Brexit. 

Rolled-up holiday pay will be allowed

The most significant proposal is to allow rolled-up holiday pay as an optional way of calculating holiday pay for all workers.

Rolled-up holiday pay is a system where a worker receives an additional amount or enhancement with every payslip to cover their holiday pay, as opposed to receiving holiday pay only when they take annual leave. It used to be common for casual or temporary workers to be given rolled-up holiday pay to help make calculating holiday pay simpler, but EU case law says it is not allowed.

The new proposal would give employers a choice between using the existing 52-week holiday pay reference period and rolled-up holiday pay to calculate holiday pay for their workers with irregular hours.

Employers could also choose to use rolled-up holiday pay to calculate and pay the holiday pay of their workers who have regular hours, as the government anticipates this may have benefits for both workers and employer.

What does this mean for employers?

The government proposes that that rolled-up holiday pay should be paid at 12.07% of a worker’s pay on each payslip, as 12.07% is the proportion of the year taken up by statutory annual leave (5.6 weeks of statutory annual leave divided by 46.4 working weeks of the year). In other words, statutory annual leave entitlement is 12.07% of hours worked by a worker. Employers would need to adjust this percentage to account for any contractual leave they offer beyond the statutory annual leave entitlement.

Employers will need to make their workers aware if they choose to start paying rolled-up holiday pay and this payment would have to be clearly marked on a worker’s payslip as their holiday pay. When the worker goes on holiday, they would not receive any further pay whilst away as they would have already received their holiday pay whilst working. 

We anticipate that the government is likely to include measures in the draft legislation to ensure that an employer cannot avoid the obligation to provide paid annual leave by claiming that holiday pay is included in what is, in reality, just the basic hourly pay. 

Allowing rolled-up holiday pay is a welcome move to help make dealing with holiday pay for casual and temporary workers more straight-forward. 

Merging holiday entitlements

Currently, employees have two separate holiday entitlements consisting of four weeks leave required by the EU law, and an additional 1.6 weeks provided by UK law. The government plans to merge these two separate leave entitlements into one pot of statutory annual leave of 5.6 weeks, meaning we would keep the same amount of statutory leave entitlement overall in the UK. 

As things stand, different rules apply to EU and UK holiday entitlement which makes dealing with holiday more complicated for employers. For example, there are differences in the rate at which holiday must be paid (ie whether it should include commission, bonuses and overtime) and when holiday can be carried forward from one holiday year to the next. 

Workers should receive their normal remuneration for the four weeks’ leave required by EU law. This means it should include certain types of commission, bonuses and overtime. However, the 1.6 weeks’ leave provided by UK law does not have to reflect the worker’s normal remuneration and can be paid at their basic pay rate. This makes calculating holiday pay more complicated for employers.

The government is consulting on having a single rate of pay for the whole 5.6 weeks’ holiday entitlement and what that should be. 

What does this mean for employers?

Some employers already pay the whole 5.6 weeks of leave at a worker’s normal rate of pay because of the administrative time of paying leave at differing rates. Businesses that don’t could face significant additional costs if the entire 5.6 weeks’ leave has to be paid at a worker’s normal pay rate as a minimum in future. 

The government recognises the financial impact that requiring the 5.6 weeks of leave to be paid at a worker’s basic pay rate as a minimum would have on workers.  It is consulting on how holiday pay is currently calculated and how employers and workers think it should be defined in the legislation, including whether workers should be paid their basic pay or normal pay (including certain types of overtime, commission, and bonuses) for all 5.6 weeks. 

No changes are proposed in terms of when leave can be carried forwards into the next leave year. This means workers will still not be able to carry the four weeks’ EU leave into the next leave year unless they have been unable to take it in certain scenarios (eg being on certain-types of leave including long-term sick leave or maternity leave). Workers will be allowed to carry over 1.6 weeks into the following leave year if there is a written agreement between a worker and their employer. 

Records of working time 

The government is planning to remove retained EU case law that requires employers to record working hours for almost all members of their workforce.

This relates to the ECJ’s ruling in CCOO v Deutsche Bank in which the European Court of Justice (ECJ) ruled that employers must record the specific working hours worked by each worker in order to comply with the Working Time Directive. The UK Working Time Regulations only require employers to keep adequate records to show that they are complying with the maximum 48-hour week (in relation to workers who have not opted out). 

What does this mean for employers?

Whilst this move is likely to be welcomed by employers, many do not currently record the specific working time of their workers, except for the purpose of calculating pay, so this is unlikely to have a significant impact in practice for most employers. 

Holiday accrual in the first year of employment

The government also plans to change the way that a worker’s leave is calculated in the first year of employment so that workers would accrue their annual leave entitlement at the end of each pay period until the end of their first year of employment. 

What does this mean for employers?

Employers should look out for new regulations which will set out a method for calculating holiday entitlement for workers in their first year of work. 

Employers could choose to provide their workers with annual leave entitlement more frequently than monthly, for example, if they pay their workers weekly or daily. 

Other proposed changes for part-year and irregular hours workers

The government already consulted earlier in 2023 on possible reforms to holiday entitlement for workers who work only part of the year or irregular hours. This was in response to last year’s Supreme Court decision in Harpur Trust v Brazel in which it was held that, under the Working Time Regulations, holiday entitlement for permanent part-year workers should not be pro-rated so that it’s proportionate to that of a full-time worker. Read our summary of the decision here. 

The government is proposing to introduce a holiday entitlement reference period for both part-year and irregular hours workers to ensure holiday entitlement and pay is directly proportionate to time spent working.

Scrapping the ‘sunset’ clause

In September 2022, the government introduced a Bill to end the supremacy of EU law. The Bill includes provisions which allow certain retained EU law to be saved (by being reinstated), replaced or scrapped altogether by 31 December 2023. This would include the Working Time Regulations 1998.

Significantly, the Bill as originally written included a ‘sunset’ clause which meant that, at the end of 2023, what was left of certain retained EU law would simply disappear. 

The government has now announced a new approach which is to replace the sunset clause with a list of EU laws to be revoked. This is a sensible step given the tight timeframe afforded by the sunset clause. 

The government has published a list of the EU laws it plans to revoke at the end of 2023. No key employment laws are being revoked. Important retained EU employment law including the Working Time Regulations 1998 and the TUPE Regulations will be retained.