Time to review holiday pay processes

New holiday pay legislation has come into effect from 1 January 2024 which will impact all employers and follows a recent government consultation and the UK’s withdrawal from the EU. This is welcome news for those that use irregular hours workers, such as casual or bank workers. The new legislation also codifies how holiday pay must be calculated for those who earn commission, are paid overtime and other pay elements.

For many, that will mean revisiting their calculations to ensure they are compliant. With the Supreme Court recently confirming that holiday pay liabilities can go back two years, employers must plan carefully for these changes to mitigate the risk of accruing a holiday pay liability, whilst budgeting properly for future holiday pay costs.

Commission and regularly paid overtime 

The previous holiday pay legislation broadly stated that where workers earn a salary, they are entitled to their ‘normal remuneration’ when they take holiday. Many employers typically only paid basic salary when workers took holiday, but this led to a raft of claims that normal remuneration also meant other payments such as commission, overtime payments and allowances. Most of these claims were successful, leading to employers having to review their holiday pay calculations and repay arrears of holiday pay.

The new holiday pay law which came into effect from 1 January 2024 clarifies what constitutes normal remuneration by bringing these case law decisions into the legislative wording. So this isn’t really a change, but rather a confirmation of what the law already is. However, it does bring clarity for employers when calculating holiday pay for workers who earn additional pay on top of their basic salary. 

Unfortunately, there are still some aspects of holiday pay entitlement that have not been clarified, such as what represents ‘regularly’ paid overtime. The previous case law on this point may now have little relevance given the effect of the Retained EU Law (Revocation and Reform) Act 2023. Employers will need to carefully consider their approach to calculating holiday pay to avoid the risk of non-compliance with the new legislation and possible litigation.

12.07% to return 

For casual workers, most employers took the view that holiday accrued in proportion to the number of hours worked. This meant that for every hour worked, the worker accrued 12.07% hours of holiday, being the percentage of statutory holiday (28 days) to which workers are entitled based on the number of working days in a year.

However, the 2022 Supreme Court decision in Harpur Trust v Brazel judged this method of calculation to be unlawful, determining that holiday accrues based on length of service, not the amount of time worked. This resulted in workers who have gaps of more than a week between work being entitled to more holiday and therefore more holiday pay – effectively meaning that any employer using the 12.07% method of calculation may underpay a worker’s holiday pay.

In a welcome step for affected employers, the government intends to reverse the effect of this judgment and has proposed legislating for a 12.07% calculation for irregular hours workers. This will simplify the payroll process for calculating holiday pay and will reduce holiday pay costs that arise from the Harpur Trust decision.

This amended basis of calculation takes effect for annual leave years commencing on or after 1 April 2024. Until then, employers must still calculate annual leave entitlement and pay for irregular hour workers according to the principles set out in the Harpur Trust case.

For more information, please get in touch with Charlie Barnes or your usual RSM contact.