Holiday pay and entitlement reforms – key action points for employers

If we needed confirmation that 2024 is going to be a busy year for HR professionals and in-house employment lawyers, it came on 1 January when significant holiday pay and entitlement reforms took effect and the government issued accompanying guidance for employers to put at the top of their New Year reading list.

The Regulations detailing the reforms were first published in November and were formally approved by parliament just before the Christmas break. Those Regulations work by amending the existing provisions of the Working Time Regulations 1998. For ease in this article, we have referred to the amending Regulations as the ‘new Regulations’.

With new rules governing carry-over and holiday pay calculations for all workers, and a whole new holiday regime for ‘irregular hours’ and ‘part year’ workers for holiday years starting on or after 1 April 2024, the new Regulations cover significant ground. For more detail on what is changing, check out the summary (available here) which we pulled together when the new Regulations were first published in draft form.

Now that the new Regulations are in force and additional government guidance has been issued, the onus is on employers to review their current holiday pay and entitlement arrangements and decide on next steps. In this article, we pick out some of the key actions for employers to add to their 2024 ‘to do’ list.

Government guidance

Guidance was issued by the government last week to coincide with the new Regulations coming into force. It is made up of new guidance on holiday pay and entitlement reforms from 1 January 2024 (available here) and tweaks to an existing guide on holiday entitlement (available here). Employers should review this guidance as they assess their next steps.

The guidance sheds some light on the intended scope of the holiday reforms and contains some worked examples that may be helpful to those running holiday entitlement calculations or those designing updates to payroll and time & attendance systems to run those calculations. However, it does not address some of the key unresolved issues raised by the new Regulations. For example:

• The guidance provides some examples of those workers who do and do not qualify as ‘irregular hours workers’ or ‘part year workers’. This provides some insight into the types of workers that the government intended to capture within the new definitions of ‘irregular hours worker’ and ‘part year worker’. However, it is hard to marry up the wording of those definitions with some of the examples given in the guidance and there remains some concern that wider categories of workers may inadvertently be covered by the definitions in the new Regulations.

• In relation to the codified holiday pay rules for all workers and despite pleas from numerous commentators, the guidance does not provide much new detail on the payments that need to be included in holiday pay where the worker is entitled to be paid at their ‘normal’ rate of pay. It largely replicates the wording from the new Regulations and this is, therefore, likely to be an area for future litigation. The guidance does, however, provide some useful additional context which is not contained in the new Regulations, such as stating that ‘pay received by a worker whilst they are on holiday should reflect what they would have earned if they had been at work and working’.

• On the new carry-over rules, the guidance does not clarify how far employers will be expected to go to ‘encourage’ workers to take their holiday and to ensure they have a ‘reasonable opportunity’ to take that holiday.

As a result, there remain a number of unresolved issues and it may be some time before we receive further clarifications (whether from the courts or elsewhere). It is also worth bearing in mind that the guidance is not binding so tribunals could still potentially interpret the new Regulations in a way that is inconsistent with the government’s guidance.

Key actions for employers

The potential risks and any opportunities for change will differ from employer to employer, as the impact of the reforms will depend on the nature of your workforce and your current holiday arrangements. Our pick of the key actions for you to consider at this stage is detailed below.

• On the ‘irregular hours’ and ‘part year’ worker reforms:

• Audit your workforce to identify which of your workers may qualify as ‘irregular hours’ or ‘part year’ workers under the new Regulations.
• Check the holiday year for those workers. The relevant reforms kick in for holiday years starting on or after 1 April 2024, meaning you could have anywhere between 2.5 and 15 months to prepare.
• If you identify irregular hours or part year workers:
• Review their holiday arrangements and consider whether you will need to make changes to ensure that you are compliant with the new rules when they kick in. Where necessary, liaise with your payroll provider (and/or payroll team) to check if your payroll systems can cope with any required changes.
• Review contractual terms and policies to see whether any changes are required and, if they are, consider what steps are needed to make those changes.
• Decide whether or not to adopt and/or continue rolled-up holiday pay arrangements taking into account the relevant pros and cons. If continuing existing rolled-up holiday pay arrangements, you should review your processes to check that they match up with the new rules.

• On the codified holiday pay rules:

• Consider carrying out an audit to identify any payments that you pay to workers but do not currently include in holiday pay and assess the risk that those payments should now be included.
• Review the terms and policies that govern any such additional payments and consider whether any changes to those schemes would help to mitigate the holiday pay risks and/ or whether you ought to consider what levels of payment you might make under those schemes moving forward.
• Check your current holiday pay processes are compliant with the new reference period.

• On the new carry-over rules:

• Check that you have appropriate procedures in place for workers to carry-over holiday where they are unable to take it due to sick leave or family-related leave.
• Check that you have the right policies, contract wording and reminders in place encouraging workers to take their holiday and informing them about limits on that holiday. This should include clear warnings where you have a ‘use it or lose it’ policy in place for holiday (allowing for the usual exceptions).

The above is just a snapshot of some of the key actions for you to consider. The priority areas for each organisation will differ and you may need to invest more time investigating some of the above points than others.

Given the ongoing uncertainties surrounding the reforms (such as who constitutes an ‘irregular hours’ or ‘part year’ worker), it will be important to take legal advice where relevant. We have extensive experience of advising on complex holiday pay and entitlement issues and carrying out audits to assess potential risks, so please do get in touch if we can assist your organisation. If you would like to discuss any of the potential implications of the reforms, please get in touch with Luke Bowery, Adrian Martin or your usual employment team contact.

Disclaimer

This briefing gives general information only and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, you should not rely on it as legal advice. We do not accept any liability to anyone who does rely on its content.