Holiday leave and pay for employees
Updates to the Law on Holiday Pay as of 1st January 2024
On 8th November 2023, the Secretary of state for Business and Trade introduced the Draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023.The regulations make provisions relating to employment under the Work and Families Act 2006 and the Retained EU Law (Revocation and Reform) Act 2023. This follows on from the government’s response to two consultations launched earlier this year on the holiday provisions under the Working Time Regulations 1998 (WTR 1998) and on the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) published on the same day.
The regulations seek to amend sections of the TUPE regulations and the Working Time Regulations and are scheduled to come into effect on 1st January 2024. The draft regulations are a significant step in the REC’s calls for the government to provide some much-needed clarity on the calculation of holiday entitlement and holiday pay for agency workers, particularly in light of the outcome of the Harpur Trust v Brazel case.
What changes have been introduced to the Law on Holiday Pay?
Accrual of holiday and payment of holiday pay
The amendments to the WTR 1998 introduce a legal right for part year workers and irregular hour workers to accrue holiday leave at the rate of 12.07%. Additionally, the amendments legalise the payment of rolled up holiday pay.
Holiday entitlement will be accrued at the rate of 12.07% of the hours worked by a worker in each pay period and holiday pay will be paid at a rate of 12.07% of the remuneration received in each pay period. Payslips must indicate the amount of holiday pay that has been paid for the period to which the statement relates.
Carrying over leave
The amendments to the WTR remove the right to carry over leave for reasons related to Covid-19. WTR currently allow workers to carry over the 4 weeks of leave into the following two leave years if it was not reasonably practicable for a worker to take this leave in the year to which it related under WTR 13(10) and 13(11).
Due to the amendments, from 1 January 2024 workers will no longer be able to accrue Covid-19 carryover leave, however workers may still have leave to use, so workers will still be able to use all leave accrued prior to 1 January 2024 on or before 31st March. 2024.
Calculation of holiday entitlement and holiday pay for carry over leave accrued during statutory leave
The amendments to WTR introduce a 52-week reference period for the calculation of holiday entitlement and pay. To calculate holiday carried over into another leave year which was accrued during statutory leave, employers including employment businesses and employment agencies will need to look back over a 52-week reference period which will allow employers to look back and work out an average of hours worked across that period. Employers will need to include weeks not worked and not on statutory leave so that leave accrued during this time is proportionate to the time actually worked.
When calculating holiday pay an employer could use the current 52-week reference period for holiday pay in accordance with S224 Employment Rights Act 1996 (ERA). This involves looking back at the last 52 weeks (or less if they have not been engaged for 52 weeks), taking out any weeks where they have not earned any pay or they have received statutory payments such as SSP (adding in additional weeks up to a maximum of 104 to give you the full 52 weeks where applicable). You add this together and divide by the number of weeks you are using to get the average weekly pay.
FAQ’s on the updates to calculating holiday leave and holiday pay entitlement
Please see the most commonly asked questions here.
Does the Harpur Trust and Brazel case affect holiday pay calculations for my business?
In July 2022 the Supreme Court published its judgement in the Harpur Trust v Brazel case. The case, first brought before the Employment Tribunal in 2015, cast doubt over the widely used method of prorating holiday entitlement for such workers.
The immediate impact of the decision was on employed (contract of employment) part-year workers.
Background
Ms Brazel, a music teacher, brought a claim before the Employment Tribunal for unlawful deductions from wages by underpayment of holiday pay against her employer, Harpur Trust (‘the Trust’). Ms Brazel was engaged on a zero-hours contract and worked as and when there was a demand for her services. She argued that as a permanent employee she was entitled, in accordance with the Working Time Regulations 1998 (‘WTR’), to the full 5.6 weeks holiday leave and her pay should be calculated in accordance with Section 221- 224 of the Employment Right Act 1996, which at the time was calculated based on the average income earned immediately 12 weeks prior to her leave. The Trust, in accordance with the ACAS guidance at the time, had been calculating Ms Brazel’s entitlement and pay on a pro rata basis. The method involved deducting 5.6 weeks from the 52-week year, leaving 46.4 weeks during which to accrue the holiday, also expressed in percentage terms as 12.07%. The Trust would then calculate the hours Ms Brazel had actually worked and multiply them by the 12.07% to arrive at her holiday entitlement.
The Employment Tribunal and Employment Appeal Tribunal Decisions
In the first instance the Tribunal found in favour of The Trust, agreeing that the correct approach to holiday entitlement had been adopted and the result of using this method provided Ms Brazel with proportionately the same holiday entitlement as that of a full-time employee. However, the case was subsequently heard by the Employment Appeal Tribunal (EAT) who disagreed with the first instance decision and found in favour of Ms Brazel. The EAT held that the legislation was clear and unambiguous in that Ms Brazel was entitled to the full 5.6 weeks leave, stating there was no room to read into this prorating method.
The Court of Appeal Decision
The Trust then brought the matter before the Court of Appeal (‘CA’), arguing that the decision of the EAT would give rise to a significant and unjustifiable benefit to part-year workers in comparison to those who worked year-round. Accordingly, the method they had adopted avoided an outcome such that Parliament would not have intended. The CA dismissed the appeal noting that whilst legislation provided for prohibition of less favourable treatment towards part time employees, there was nothing that prohibited the opposite effect. The legislation was clear as to Ms Brazel’s entitlement and concurring with the EAT, prorating could not be read into the WTR.
Subsequently, Government guidance issued by the Department for Business Energy and Industrial Strategy (BEIS), titled “Calculating holiday pay for workers without fixed hours or pay”, was amended to align with the CA’s decision. Previously, advocating the 12.07% method, the guidance now states that the 5.6 weeks full entitlement should be used in conjunction with a reference period of 52 weeks when calculating the holiday entitlement of workers who work for only part of the year.
However, it is significant that the Court of Appeal highlight the fact that Ms Brazel was not a casual worker but rather that ‘On the contrary, she is employed under a permanent, in the sense of continuing, contract of employment, albeit one where the Trust is not obliged to provide a fixed minimum amount of work and pays only for the work done.’
Arguably the Court’s decision is applicable to part-year worker, engaged on permanent contracts of employment.
The Supreme Court Decision
As a result of the CA’s decision, the Trust appealed to the Supreme Court and a hearing took place on 9 November 2021. The Supreme Court’s judgment published on the 20 July 2022 upheld the decision of the CA which means employers are required to calculate an employee’s holiday in strict accordance with the WTR. The Court concurred with the CA’s reasoning confirming that the Working Time Regulations were very clear on the correct method of calculation and to resort to alternative methods would not be lawful. The Court considered the alternative methods of calculation proposed by Harpur Trust were simply too complicated, required significant record keeping by both the employer and worker and if the calendar week calculation did represent a more favourable outcome, it wasn’t “so absurd as to justify the wholesale revision of the statutory scheme.”
As a result of the decision all part-year employees engaged on a permanent contract of employment will be entitled to the full 5.6 weeks holiday leave even if they don’t have fixed hours. Pay will then need to be calculated as provided for in Section 221-224 of the Employment Rights Act which requires looking at the earnings of the individual 52 weeks immediately prior to their leave to calculate their average income before arriving at the holiday pay due.
The Implications
Given the onus of the case being on part-year workers who are engaged on permanent contracts of employment, as opposed to contracts for services, the decision has an immediate impact for employment businesses which either use an employment model for their temporary workers or who work with umbrella companies.
The practical implications for employers are twofold. Firstly, the employment contract may need to be amended. If the contract is not prescriptive over how holiday pay is calculated, then no changes will be necessary. However, should the contract reflect the 12.07% accrual method, this will need to be rectified. Affected employees should be provided with a revised contract and a written explanation as to the impact the change will have on them. It should specify when the changes will take effect and include an offer to discuss the amendment should they wish to, before signing and returning the contract. If a contractual amendment is not required, the change of the method of calculation should, as a matter of best practice, still be explained to the affected employees.
Even if the contract does not need to be amended, the method of calculating holiday pay will need to be amended.
Secondly, there is the risk that employees who have (to date) been paid using the 12.07% accrual method, could bring a claim for unlawful deduction from wages. However, under the Deductions from Wages (Limitation) Regulations 2014, the claim will be capped to 2 years of backdated pay from the date on which the claim is raised. Furthermore, a claim must be brought within 3 months of the unlawful deduction, or where there has been a “series of deductions”, within 3 months of the last deduction made. In accordance with the decision in the case of Bear Scotland Ltd v Fulton [2014], if there is a gap of more than 3 months within the series of deductions, the chain will be broken and a claim for the previous deductions will be lost. This decision however has recently been the subject of much criticism by the Court of Appeal in the recent case of Smith v Pimlico Plumbers [2021] and may be overturned.
Depending upon the agreement in place, it may be possible to recover additional holiday pay from the client, for future payments for which the worker is now entitled. For example, clause 6.2.1 of our model Contract 15 provides a right to vary charges, should any “additional liability be imposed by statute or other legal requirements or entitlements”. If however, no such term has been included, it may be very difficult to recover any financial loss as a result of the extra holiday pay liability and subsequently will be need to borne solely by the employment business.
For employment businesses that engage with umbrella companies, to limit holiday pay liability going forward, rather than continuing with a contract of employment they may decide to transfer their workers to contracts for services. As the umbrella workers are engaged on a contract of employment, it gives those workers full employment rights because they are classed as employees. So any decision to change the contract from a contract of employment to a contract for services will amount to a termination of the employment contract. An employed worker will have protection from unfair dismissal after two years’ service, meaning that their contract can only be ended if a fair legal reason to terminate the employment applies. Terminating employment is regarded as a dismissal. As well as a fair reason, the employer (the umbrella company) must follow a fair procedure. The fair legal reasons to end employment under the Employment Rights Act 1996 are as follows: a) Capability/performance of the employee; b) Conduct of the employee; c) Redundancy; d) The employee could not continue to work in the position which s/he held without breaching a statutory requirement or restriction imposed by law; or e) Some other substantial reason (SOSR) of a kind, such as to justify the dismissal of an employee holding the position which the employee held. The end of the employment contract could result in situations where redundancies could arise, or other difficulties which may give rise to SOSR grounds to terminate umbrella worker contracts. If they retain the workers on a contract of employment, they will increase their charges to cover the additional holiday pay.
Because of this decision, you must assess the extent of any potential liability to back pay and review current contractual arrangements, considering what amendments (if any) may need to be implemented to be compliant with the new legal position. It is then imperative that moving forward, any future holiday entitlement and pay is calculated in accordance with the Supreme Court's decision.
For employment businesses that use a contract for services, it is arguable that the decision given here does not apply. However, this could be debated in future cases and there is scope for the argument to be made to extend the case to contract for services workers.
For employment businesses that use a contract for services, it is arguable that the decision in Harpur Trust did not apply. However, there was scope for the argument to be made to extend the outcome of the case to contract for services workers.
In the judgement the Supreme Court commented on the complexity of calculating holiday pay for workers working irregular number of hours per week over the course of the year, and the challenges of applying the holiday pay rules, which pointed to a need to review the legislation to find more straightforward solutions for the benefit of all employers.
The REC will be reviewing contracts in light of the decision. In addition, the fact that the Supreme Court itself commented on the complexity of calculating holiday pay for workers working irregular number of hours per week over the course of the year, and the challenges of applying the holiday pay rules, points to a need to review the legislation to find more straightforward solutions for the benefit of all employers. On 8th November 2023, the Secretary of state for Business and Trade introduced the Draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023.
The draft regulations seek to amend the WTR 1998 are a significant step in the REC’s calls for the government to provide some much-needed clarity on the calculation of holiday entitlement and holiday pay for agency workers, particularly in light of the outcome of the Harpur Trust v Brazel case.
Holiday pay issues at the end of the year
As we approach the end of the year, as expected holiday and holiday pay is one of the most frequently asked questions on the legal helpline.
The questions we’re getting include:
1. Can workers carry their accrued but not taken leave to the following leave year?
2. Can we roll up holiday pay into the worker’s hourly rate?
3. What is the position with respect to bank holidays?
Can workers carry their accrued but not taken leave to the following leave year?
All workers (employees and agency workers) are entitled to at least 5.6 weeks paid holiday each year. This equates to 28 days. Normally, workers must take their holiday within their holiday year which runs either 12 months from the anniversary of the start of their employment, or as per the holiday year specified in their contract. Many employers have a holiday year that runs from 1 January to 31 December.
Usually if a worker doesn’t take all their leave within the holiday year, they may lose it, as employers are not obliged to allow workers to roll unused leave into the next year. The established exceptions to this include where a worker has been unable to take their holiday because of long-term sickness absence or maternity leave and, in certain circumstances where the employer has not done enough to get their workers to take their leave.
On 26th March 2020, regulations were introduced to allow workers carry forward up to 4 weeks (20 days) of their statutory holiday if they are unable to take it because of the impact of coronavirus. Workers were able to carry their holiday forward for up to two years where it had not been reasonably practicable for the worker to take some or all of their entitlement, because coronavirus has affected the worker or their employer, or the economy or society more broadly. Workers who have accrued leave for reasons related to Covid-19 will be able to carry over leave until 1st January 2024. From 1 January 2024 workers will no longer be able to accrue Covid-19 carry over leave, however workers may still have leave to use, so workers will still be able to use all leave accrued prior to 1 January 2024 on or before 31st March 2024. All leave accrued for reasons related to Covid.
The regulations did not specify exactly what is meant by ‘not reasonably practicable’ to take the holiday, but the factors suggested in the government’s guidance included the employers business having faced a significant increase in demand due to Covid-19that would reasonably require the worker to continue to be at work and that could not be met through alternative practical measures.
The amendments to WTR 1998 introduce a statutory right to carry over leave that a worker was unable to take in the leave year in which it was accrued due to sick leave which was previously provided for in case law. The leave can then be carried over into the following leave year for a period of up to 18 months from the end of the leave year in which it was accrued. When calculating holiday pay for carry over leave in these circumstances, an employer should use the current 52-week reference period for holiday pay in accordance with S224 Employment Rights Act 1996 (ERA). This involves looking back at the last 52 weeks (or less if they have not been engaged for 52 weeks), taking out any weeks where they have not earned any pay or they have received statutory payments such as SSP (adding in additional weeks up to a maximum of 104 to give you the full 52 weeks where applicable). You add this together and divide by the number of weeks you are using to get the average weekly pay.
Can we roll up holiday pay into the worker’s hourly rate?
Members are currently advised to use the accrued holiday method which is in line with the requirements of the Working Time Regulations 1998 (WTR) however, following draft amendments to the Working Time Regulations due to be enacted on 1st January 2024, but due to take effect where an employer’s leave year starts on or after 1st April 2024 it will be lawful for employers to pay rolled up holiday pay to part year workers and irregular hour workers.
Before these draft amendments to the Working Time Regulations 1998 take effect, all employers should:
- ensure that workers are informed clearly of their leave entitlement
- ensure that workers are informed clearly of when the leave year runs to and from
- remind workers throughout the leave year of their remaining entitlement and that they should take it by the end of the leave year.
We recognise that due to the nature of atypical working patters, rolled up holiday is used by many recruiters and other employers with atypical workforces. Unfortunately, the decision in the Robinson-Steele v RD Retail case has very much muddied the waters, a point acknowledged in the Department of Business and Trade (DBT) formerly, BEIS guidance on holiday pay for workers without fixed hours or pay.
The case, finding that holiday pay paid to a worker on a rolled-up basis with the worker’s consent, 'transparently and comprehensibly' could be set off against holiday pay, made the position less clear. The decision was given further emphasis by the decision in Lyddon v Englefield Brickwork, which suggests that employers could continue to apply this process.
However, this was still not a satisfactory situation and there was a risk to all employers who continued to use the rolled-up holiday pay method. We therefore advise members not to do so and to pay holiday payments as and when workers take their leave. This should however be done in conjunction with the advice in the bullet points above, because a common allegation levelled at the recruitment sector is that not enough is done to get workers to take their leave, resulting in an advantage to the employment business if payment has been received in the client charge rate but with the worker losing the leave at the end of the leave year if the leave is not taken.
On 8th November 2023, the Secretary of state for Business and Trade introduced the Draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023.The regulations make provisions relating to employment under the Work and Families Act 2006 and the Retained EU Law (Revocation and Reform) Act 2023. This follows on from the government’s response to two consultations launched earlier this year on the holiday provisions under the Working Time Regulations 1998 (WTR 1998.
The amendments to the WTR 1998 introduce a statutory obligation to inform a worker of their entitlement to leave/pay instead of leave, to provide them with the opportunity to take the leave and to inform a worker that any leave not taken by the end of a leave year will be lost.
The amendments also introduce legal right for part year workers and irregular hour workers to accrue holiday leave at the rate of 12.07%. Additionally, the amendments legalise the payment of rolled up holiday pay.
Holiday entitlement will be accrued at the rate of 12.07% of the hours worked by a worker in each pay period and holiday pay will be paid at a rate of 12.07% of the remuneration received in each pay period. Payslips must indicate the amount of holiday pay that has been paid for the period to which the statement relates.
What is the position with respect to bank holidays next year?
The 5.6 weeks (28 days) statutory holiday entitlement is inclusive of bank and public holidays which means that as long as a worker receives 28 days paid holiday per year (or equivalent) an employer will have met its obligations.
It is a common misunderstanding that all workers have the right to take bank and public holidays as paid leave in addition to their statutory leave. That is not the case and although it is common for employees to be given a right to take these days off and be paid, it is not a statutory right. Ultimately it is up to the employer to determine whether workers will be paid when they do not work on a bank or public holiday and whether these days should come out of the 28-day entitlement or be added to the statutory entitlement. This should be clearly stipulated in the contract.
In most cases temporary workers will only receive the statutory minimum holiday entitlement. Although, if the worker has qualified for equal treatment under the AWR, they may become entitled to holiday above the statutory minimum if the client provides this for their own direct recruits or comparable employees. If working under a contract for services, temporary workers are not under an obligation to work on any assignment. If an assignment falls on a bank or public holiday, the temporary worker can decide whether to work or not but will need to apply to take the day as part of their holiday entitlement if they wish to be paid for the day off.
Alternatively, the worker’s contract may stipulate that where an assignment falls over a day which is a bank or public holiday and the worker does not work, this will be treated as part of the worker’s holiday entitlement in which case the worker will be entitled to be paid for that day.
In England and Wales there are normally 8 bank and public holidays each year (Scotland has 9 and Northern Ireland has 10), but in some years extra bank holidays are added to celebrate events. Where this is the case, workers will not automatically be entitled to the extra day’s holiday unless the contract provides for this. If the worker’s contract states that the worker is entitled to the statutory minimum holiday, they will still only be entitled to 5.6 weeks (or the equivalent) inclusive of all of the public/bank holidays.
Workers whose contracts state that, for example, they are entitled to 20 days plus public/bank holidays will benefit from any extra public or bank holidays which are added to the calendar. If the contract does not make clear that the worker is only entitled to the usual 8 public or bank holidays (9 for Scotland and 10 for Northern Ireland).
The question of whether the worker is or is not required to work on a bank or public holiday will depend on the terms of the contract. Again, if the worker has qualified under the AWR, they may be entitled to equal treatment in relation to bank and public holidays in the same way the client provides them to their own direct recruits or comparable employees. Employment businesses will need to obtain further information from their clients on this point.
The question of whether the worker is or is not required to work on a bank or public holiday will depend on the terms of the contract. Again, if the worker has qualified under the AWR, they may be entitled to equal treatment in relation to bank and public holidays in the same way the client provides them to their own direct recruits or comparable employees. Employment businesses will need to obtain further information from their clients on this point.
What is the current entitlement?
The current statutory leave per annum for full-time workers (with leave expressed as a percentage of the working year):
From 1 April 2009 = 5.6 weeks (12.07%).
The amendments to WTR 1998 which come into effect on 1st January 2024 introduce a legal right for part year workers and irregular hour workers whose leave years start on or after 1st April 2024 to accrue holiday leave at the rate of 12.07%. Holiday entitlement will be accrued at the rate of 12.07% of the hours worked by a worker in each pay period.
5.6 weeks is the equivalent of 28 days and this amount can include the worker’s entitlement for taking public and bank holidays, these days may count towards the minimum holiday entitlement. Employment businesses can include clauses in the contracts with the worker to explain how bank and public holidays will be dealt with.
The Working Time Regulations 1998 (the “WTR”) do not prevent employers from requiring workers to work on bank or public holidays (except bank workers on bank holidays under the Banking and Financial Dealings Act 1971).
What is the difference between statutory leave and contractual leave?
Statutory leave: this is the minimum amount of leave which is granted by law and to which employees are entitled under the WTR.
Contractual leave: this is the amount of leave which an employer can, give to employees which is above the statutory minimum leave. It is called contractual leave because it is granted to the employee as part of their contract.
Who is entitled to statutory leave?
The WTR state that all “workers” are entitled to statutory leave. The definition of a worker includes an individual working under a contract of employment and so your employees will be entitled to statutory leave.
How much statutory leave are employees entitled to?
Since 1 April 2009, the minimum statutory leave is 5.6 weeks spread over a 52-week year. This means that full time employees (those working 5 days per week) are entitled to 28 days statutory leave per year (e.g. 5.6 x 5 days = 28 days) and part-time workers will be entitled to holiday on a pro-rata basis.
The amendments to WTR 1998 which come into effect on 1st January 2024 introduce a legal right for part year workers and irregular hour workers whose leave years start on or after 1st April 2024 to accrue holiday leave at the rate of 12.07%. Holiday entitlement will be accrued at the rate of 12.07% of the hours worked by a worker in each pay period.
Please note that the statutory paid holiday entitlement is capped at 28 days, so if a worker works more than a 5 day week, he or she will only be entitled to a maximum of 28 days of statutory paid leave per annum. Workers can be entitled to more leave under the terms of their contract. If a temporary agency worker has qualified for equal treatment under AWR 2010, they are entitled to any additional non-statutory leave that any directly comparable workers directly engaged by by the hirer are entitled to.
When does a leave year start?
An employee’s leave year begins on whichever date is set out in a “relevant agreement”.
A relevant agreement is:
a) a workforce agreement which applies to the employee; or
b) any provision in a collective agreement which forms part of a contract between the employee and the employer; or
c) any other agreement in writing which is legally enforceable between the employee and the employer – for instance, this would include a term in a contract, initial particulars of employment or other agreement in writing, such as terms of engagement.
Where there is no such enforceable agreement in writing then the Working Time Regulations 1998 set default dates as follows:
- If the employee’s employment begins after 1 October 1998 then the leave year will commence on the date on which their employment commenced and on the anniversary of that date in each subsequent year;
- For employees whose employment commenced on or before 1 October 1998 then the leave year will commence on 1 October and on the anniversary of that date in each subsequent year.
Many employment businesses have chosen a fixed annual leave year such as 1 January to 31 December. However this can present problems with temporary workers towards the end of the fixed leave year if a significant number of the temporary workforce has not taken leave and then wish to do so. A shortage of temporary workers and cash flow problems are possible consequences of this approach. So if you would rather have different leave years for each worker, this could be done by inserting a clause in their contract stating that their leave year begins on the day they commenced their assignment (and state the date).
It is recommended that all employment businesses remind temporary workers at least 3 months before the end of the holiday year to take their entitlement otherwise they will not be permitted to carry it over to the following leave year and will lose the benefit of the leave. The amendments to WTR which come into force on 1st January 2024 statutory obligation to inform a worker of their entitlement to leave/pay instead of leave, to provide them with the opportunity to take the leave and to inform a worker that any leave not taken by the end of a leave year will be lost. This obligation is currently provided for in case law.
It is particularly important that employment businesses remind workers of their right to leave due to the risks of claims for unpaid holiday pay following the outcome of the Supreme Court case of Chief Constable of Police Service of Northern Ireland v Agnew. In its judgment, the Supreme Court determined that workers can bring claims for a series of underpayments and/or non-payment of pay (including holiday pay) even where there are gaps of more than 3 months between underpayments and/non- payment of pay. This means that members in the in the UK are exposed to the risk of Employment Tribunal claims for holiday pay going back up to two years due to the two year back stop implemented under the Deduction from Wages (Limitation) Regulations 2014. Members Northern Ireland run the risk of Employment Tribunal claims for holiday pay going back as far as the enactment of WTR 1998 as the Wages (Limitation) Regulations 2014 do not apply in Northern Ireland.
When does statutory leave accrue?
In an employee’s first year of employment, leave accrues at the rate of one-twelfth of their annual entitlement for each month and accrues on the first day of each month. The WTR restrict employees in their first year of employment to taking just the amount of leave they have actually accrued. E.g. full time employees may only request one-twelfth of their total entitlement for each month worked e.g. 2.33 days per month from 1 April 2009. However, employers may choose to allow employees to take more leave than they have accrued, but if they do, they will want to claw back any leave taken but not accrued when the relevant contract of employment terminates and will need to ensure that the contract includes such a provision which gives the employer the option to claw back the leave taken but not accrued on termination.
During the first year of employment, fractions of a day shall be rounded up to a half-day if the fraction is less than a half-day or a whole day if the fraction is more than a half-day. Holiday should never be rounded down.
If an employee returns to work after taking leave he will continue to accrue holiday until termination of the contract of employment. On termination of the contract of employment an employer should pay the employee for any leave accrued but not taken at the date of termination.
How do I calculate the amount of leave an employee has accrued?
As employees are typically engaged under a contract of employment, the statutory holiday entitlement (5.6 weeks) is spread over a 52-week period, as they will be continuously employed for the entire period. As discussed before, an employee will accrue their holiday at a rate of one-twelfth of their annual entitlement for each month. This is the equivalent of 2.33 days per month for the statutory minimum holiday (5.6 weeks) and the leave accrues on the first day of each month. If an employer gives a more generous holiday entitlement, then the accrual rate will need to be adjusted accordingly.
How much holiday pay is an employee entitled to?
The method for calculating a week’s pay is set out in sections 221-224 of the Employment Rights Act 1996 to determine holiday pay. These sections state that a normal weeks’ pay will be either:
- What a worker would earn in a normal working week if s/he works regular hours each week (overtime will normally be included unless the contract provides for a fixed or minimum number of overtime hours);
- If a worker’s normal working hours vary from week to week, the average hourly rate of pay multiplied by the average of their normal working hours over the previous 52 weeks;
- If a worker has no normal working hours it will be the average total pay received over the previous 52 weeks.
It should be noted that “normal working hours” means those fixed by the contract. The majority of employees will typically have their hours fixed in their contract of employment, for example Monday to Friday 9am-5pm or Monday –Tuesday 10am-2pm. Where employees have fixed hours, the holiday pay will normally be what the employee would earn in a normal working week.
The 52 week reference period for employees with no normal working hours was formerly 12 weeks but this was amended on 6 April 2020 by Employment Rights (Employment Particulars and Paid Annual Leave) (Amendment) Regulations 2018. This change was implemented to avoid large changes in the holiday pay entitlements for seasonal employes based on when they took their annual leave. A 52 week reference period allowed for more consistent holiday pay rates through the leave year.
When considering the 52 week reference period, you should only count weeks in which remuneration was received. Therefore, if an employee has weeks within the 52 week period in which they received no pay, you’ll have to go back a further week and so on up to a maximum of 104 weeks until you’ve got 52 weeks of pay to average out. If an employee has not yet worked for 52 weeks, the reference period is the total number of weeks for which the employee has worked.
Should I include commission payments in the calculation of holiday pay for my recruitment consultants?
In 2014 we saw a number of key decisions regarding the calculation of holiday pay, for example in November 2014 the Employment Appeal Tribunal held that non-guaranteed overtime must be included within the calculation of holiday pay for workers who have normal working hours (see more in the REC Report).
The case of Lock v British Gas was heard in the Employment Tribunal (ET) in February 2015, and represents another key development in the calculation of holiday pay. The case revolved around whether commission payments should be included within the calculation of holiday pay for workers with normal working hours.
It should be noted that in the UK workers who do not have normal working hours should have their holiday pay calculated by taking an average of the total pay received over a 52 week reference period. As temporary workers typically do not have their working hours fixed by their contracts, their holiday pay should normally already include any commission payments.
This case does not impact on the holiday pay calculation of temporary workers, but it is important for recruitment companies who typically pay their recruitment consultants commission.
This case was originally brought under the Working Time Regulations 1998 and was referred by a UK ET to the Court of Justice of the European Union (CJEU). The CJEU held that under the European Working Time Directive commission payments need to be included in the calculation of pay for the purposes of annual leave because they are intrinsically linked to a worker’s work. The case was then referred back to the UK ET and heard in February 2015. The ET has followed the reasoning of the CJEU and concluded that commission payments are to be included within the calculation of holiday pay.
Since the ET has ruled that commission payments should be included in the calculation, there is a risk that you could receive some backdated holiday pay claims. Businesses will now need to reconsider the basis on which holiday pay is calculated and include any commission which is intrinsically linked to a worker’s work, such as a recruitment consultant.
How does the statutory holiday entitlement interact with bank and public holidays?
The 5.6 weeks (28 days) statutory holiday entitlement can be inclusive of the bank and public holidays which means that as long as an employee receives 28 days paid holiday per year (or equivalent) an employer will have met its obligations.
It is a common misunderstanding that all employees have the right to take bank and public holidays as paid leave in addition to their statutory leave. That is not the case and although it is common for employees to be given a right to take these days off and be paid, it is not a statutory right. Ultimately it is up to the employer to determine whether employees will be paid when they do not work on a bank or public holiday and whether these days should be deducted from the 28 day entitlement or be added to the statutory entitlement. This should be clearly stipulated in the contract. In practice it is quite common for employers to stipulate a specific number of days holiday plus the bank and public holiday in addition, for example 25 days holiday plus the 8 bank/public holidays.
In England and Wales there are normally 8 bank and public holidays each year (Scotland has 9 and Northern Ireland has 10), but in some years extra bank holidays are added to celebrate particular events. Where this is the case, employees will not automatically be entitled to the extra day’s holiday unless the contract provides for this. If the employee’s contract states that they are entitled to the statutory minimum holiday, he or she will still only be entitled to 5.6 weeks (or the equivalent) inclusive of all of the public/bank holidays.
Employees whose contracts state that, for example, they are entitled to 20 days plus public/bank holidays will benefit from any extra public/bank holidays which are added to the calendar, if the contract does not make it clear that the employee is only entitled to the usual 8 public/bank holidays (9 for Scotland and 10 for Northern Ireland).
The question of whether the employee is/is not required to work on a bank/public holiday will depend on the terms of the contract.
How much notice does an employee need to give to take leave?
When an employee wishes to take paid annual leave the WTR provide that they must give the employer notice that is at least twice as long as the period of leave which they wish to take. In other words if the employee wants to take 3 days paid annual leave they must give at least 6 days’ notice.
Employers can vary this by including appropriate terms in the employee’s contract. For example an employer could specify that an employee must always give at least a week’s notice to take paid leave, regardless of how much paid leave the employee wishes to take.
How can I control or restrict an employee’s leave?
The WTR enable employers to control the taking of leave by inserting a provision in their contracts with employees requiring leave to be taken during periods agreed with and prescribed by the employer, such as a Christmas shutdown or bank holidays, or for limited periods only such as one week per quarter. Beyond that an employer can further restrict an employee from taking paid leave at certain times by including appropriate terms on the employee’s contract. For example an employer who operates in the retail sector may wish to restrict employees from taking statutory paid leave over the Christmas period.
If it is not convenient for the employer to allow an employee take leave at a certain time the WTR provide that the employer may give counter notice by notifying the employee in writing that leave cannot be taken on the dates requested and prescribing periods when leave may be taken. The employer must give notice of cancellation which is at least as long as the period of leave they wish to cancel. So if the employer wishes to cancel 3 days leave which an employee has booked, the employer must give at least 3 days’ notice of the cancellation.
What will happen if I refuse to allow an employee to take their full statutory holiday entitlement?
The WTR are health and safety legislation. Employees should be encouraged to take their annual leave at regular intervals. Employees who are refused the right to take their annual leave entitlement can take their employer to the Employment Tribunal. An Employment Tribunal can award compensation to the employee that takes into account any loss suffered. If an employer fails to pay an employee for leave taken, an Employment Tribunal can direct the employer to pay the holiday pay.
Can employees carry over their holiday to their next leave year?
The statutory annual leave must be taken in the leave year in respect of which it is due and may not be carried over from one leave year to the next. However, a relevant agreement may provide that the additional annual leave may be carried forward into the leave year immediately following the leave year it falls under. This will usually be set out in the contract itself, a contractual annual leave policy or some form of collective or workforce agreement. The REC model terms make it very clear that all holiday entitlement must be taken during the course of the leave year in which it accrues, that none may be carried forward into the next leave year and that the employee is responsible for ensuring that all holiday is requested and taken within that leave year. However, there are some exceptions to these general rules in relation to those who have been absent due to sickness absence or maternity leave provided for in case law.
One notable exception to the general rules was in relation to the coronavirus pandemic. During the pandemic, the government passed legislation (The Working Time (Coronavirus) (Amendment) Regulations 2020) to allow employees to carry forward up to 20 days of untaken annual leave into the two subsequent leave years. This right applies where it has not been reasonably practicable for the worker to take some or all of their holiday due to the effects of the coronavirus.
The amendments to WTR 1998 which come into effect on 1st January 2024 introduce a statutory right to carry over leave that a employee was unable to take in the leave year in which it was accrued due to sick leave into the following leave year for a period of up to 18 months from the end of the leave year in which it was accrued.
The amendments also revoke the Working Time Coronavirus) (Amendment) Regulations 2020. From 1 January 2024 employees can no longer accrue Covid-19 carryover leave, however employees may still have leave to use, so employees will still be able to use all leave accrued prior to 1 January 2024 on or before 31st March 2024
Do employees on sick leave retain the right to annual leave?
The European Courts of Justice (ECJ) case of Stringer and ors v Revenue and Customs Commissioners; Schultz-Hoff v Deutsche Rentenversicherung Bund in 2009 held that workers on long-term sick leave retain their right to annual leave under the Working Time Directive and have to be paid for it at their normal rate of remuneration. This will be the case even if their sickness lasts for the entire relevant leave year. The definition of a worker is the same as set out in the Working Time Regulations 1998 and will include employees. Therefore, an employee will continue to accrue holiday whilst they are off sick from work.
As of 1st January 2024 amendments to WTR 1998 will 4 introduce a 52-week reference period for the calculation of holiday entitlement and pay for irregular hour workers and part year workers when they are on statutory leave or on sick leave. The changes introduce a 52-week reference period which will allow employers to look back and work out an average of hours worked across that period. Employers will need to include weeks not worked and not on statutory leave, so it is proportionate to the time worked.
Will an employee lose their leave entitlement if they do not take their leave during the leave year?
Where a worker fails to take their leave entitlement for reasons not related to absence from work due to sickness or maternity, then their right to any paid leave not taken should not automatically be lost except where the employer has taken steps to bring the potential that this leave will be lost to the attention of the employee. In this case an employer could also mean an employment business who is engaged in the supply of temporary workers.
Employers are not obliged to force their employees to take their excess leave, but must ‘be able to show that it has exercised all due diligence in enabling the worker actually to take the paid annual leave to which he is entitled under EU law’. Where the worker has ‘refrained from taking his paid annual leave deliberately and in full knowledge of the ensuing consequences’ then the employer will not be required to carry over the leave or pay an allowance in lieu for this. This will only be the case where the reason the worker has failed to take their leave is through their own inaction rather than due to absence from work due to sickness or maternity.
This requirement for employers to inform their employees is currently derived from the 2018 Court of Justice for the European Union (CJEU) verdict in the case of Max-Planck-Gesellschaft v Shimizu. This case was examining the application of the Working Time Directive in regards to whether the right to untaken annual leave is lost at the end of the leave year and concerned Mr Shimizu, an employee of the Max-Planck Institute in Germany, who brought a claim against the Institute for unpaid holiday that he was owed from 2011 and 2012. Under German national law Mr Shimizu’s right to untaken leave from one year lapsed at the end of the year which it was to be taken and as a result of this he was not entitled to convert his leave entitlement into an allowance in lieu. Mr Shimizu brought an action against Max-Planck in December 2013 to seek an order that the Institute be required to pay an allowance corresponding to 51 days leave that was outstanding from his time working at the company. The CJEU agreed with Mr Shimizu and established that the right for an employee to be paid an allowance in lieu for any leave not taken and that the leave should not automatically be lost on the expiration of the relevant leave year.
The amendments to WTR 1998 which come into effect on 1st January 2024 introduce a statutory obligation to inform a worker of their entitlement to leave/pay instead of leave, to provide them with the opportunity to take the leave and to inform a worker that any leave not taken by the end of a leave year will be lost.
What this means for employers, and in particular for employment businesses who supply temporary workers, is that there an obligation for them to inform workers of their right to take annual leave, and when this expires. Employment businesses are already required to comply with regulation 15(f) of the Conduct of Employment Agencies and Employment Business Regulations 2015 ( the Conduct Regulations) by providing ‘details of any entitlement to annual holidays and to payment in respect of such holidays’ in the written agreement provided before commencing work-finding services. In addition, they must also comply with section 1 of the Employment Rights Act 1996 in providing a written statement of particulars including terms about ‘entitlement to holidays, including public holidays, and holiday pay’. As well as these regulatory requirements, it is also good practice to inform workers of:
- When the leave year starts; and
- The procedure required for them to book annual leave.
It is also recommended that agencies remind the worker part way through the leave year to take any remaining leave before the leave year comes to an end and his would need to be done in good time.
Does an employee have the right to carry over their holiday entitlement if it cannot be taken in the relevant leave year due to sickness?
In Sood Enterprises Ltd v Healy the Employment Appeal Tribunal has held that the right of workers to carry over annual leave because they were off sick and unable to take holiday is limited to the basic right to four weeks’ leave in Reg 13(1) of the Working Time Regulations 1998 SI 1998/1833 and that this did not have to be requested as previously held in the Court of Appeal case of Leeds v Larner 2012.
The right to carry over annual due to sickness was also covered specifically in the case of workers who were sick and unable to take annual leave because of the coronavirus. The Working Time (Coronavirus) (Amendment) Regulations 2020 allow workers to carry forward up to 20 days of untaken annual leave into the two subsequent leave years. The rights under this regulation apply where it has not been reasonably practicable for the worker to take some or all of their holiday due to the effects of the coronavirus, including due to sickness.
The amendments to WTR 1998 which come into effect on 1st January 2024 introduce a statutory right to carry over leave that a worker was unable to take in the leave year in which it was accrued due to sick leave into the following leave year for a period of up to 18 months frpm the end of the leave year in which it was accrued.
The amendments also revoke the Working Time Coronavirus) (Amendment) Regulations 2020. From 1 January 2024 workers can no longer accrue Covid-19 carryover leave, however workers may still have leave to use, so workers will still be able to use all leave accrued prior to 1 January 2024 on or before 31st March 2024.
What is the position when an employee is on maternity leave?
All contractual terms (except those relating to remuneration) subsist during both ordinary maternity leave and additional maternity leave. Therefore employees will accrue statutory and contractual leave in the normal way during both Ordinary Maternity Leave and Additional Maternity Leave. The WTR 1998 do not permit statutory annual leave to be carried over from one leave year to the next, nor do they allow an employer to insist that she carries over leave that she cannot take due to maternity leave, and so the employee could lose some or all of her entitlement if her maternity leave extends into the next leave year. However, the 2005 European Court of Justice (ECJ) ruling in Merino Gómez v Continental Industrias del Couchoin held that an employee is entitled to take annual leave before or after her maternity leave as she cannot take it, or be compelled to take it, at the same time as her maternity leave. Therefore employers must accommodate their employees so that they do not lose the benefit of that holiday.
If the employee chooses to not take their annual leave, does the employer have to pay them the holiday pay for this or roll over their entitlement?
It is important to note that there is no specific obligation on employers to ensure their employees take their holiday entitlement but it is unlawful for them to prevent the employees from taking it. It is largely accepted that an employer should, as a minimum, make their employees aware of what their holiday entitlement is, the date by which their holiday will need to be taken (i.e. their annual leave year) and any conditions attached to taking their holiday, such as notice periods. It is also advisable to remind employees to take annual leave to avoid losing their entitlement for the respective leave year. This could be achieved by including this information in their contract or relevant agreements and policies.
The WTR restrict employers from paying employees in lieu of the statutory minimum holiday entitlement, except on termination of employment. Employers should really encourage their employees to take their leave, especially from a health and safety and a well-being perspective.
How do I calculate holiday for employees at the end of their employment?
The WTR require employers to pay a sum of money to employees when their employment ends, to compensate them for statutory leave they have accrued but not taken during their employment. The WTR set out that the way in which this compensatory payment must be calculated. The employer must pay an employee either:
- a sum as set out in a relevant agreement between the employee and employer; or
- in the absence of a relevant agreement, a sum equal to the payment the employee would have received if he or she had taken the paid leave.
The WTR do not specify what sum should be paid to an employee if a relevant agreement is used, but previous case law has made it clear that it cannot be a zero payment. On the face of it this has left open the possibility that employers could pay employees less than they would have received if they had taken the leave during employment.
Some years ago the Court of Justice of the European Union (ECJ) indicated that holiday pay paid on termination under a relevant agreement must reflect the amount of holiday pay that an employee would receive during employment.
Although this was not binding, this view has now been followed by an employment tribunal (ET) in the case of Podlasiak v Edinburgh Woollen Mill Limited. Here the ET rejected the employer’s relevant agreement which stated that the claimant was entitled to just £1 for the three days untaken leave owed to her when her employment ended. The ET interpreted the WTR in a way which in its view complies with the European Working Time Directive and ordered the employer to pay the employee the same sum as she would have received if she had taken the leave during her employment.
Other employment tribunals are not required to follow this decision but this does raise the possibility that the same line of thinking could be taken in similar cases.
Employers using relevant agreements to pay employees reduced amounts of different sums (particularly minimum token payments) may wish to review their procedures and at the very least be aware of the potential exposure they could have if facing similar claims.
Holiday pay must now include commission
In January 2014 the REC Legal team reported on the case of ZJR Lock v British Gas (see https://rec.uk.com/download_file/view/2360 ). That case had been referred to the European Court of Justice (ECJ) by a UK Employment Tribunal (ET)– the question was whether holiday pay should be calculated to include commission earned prior to taking annual leave. The preliminary opinion was “yes, it should” and that has now been confirmed by the ECJ. This means that where a worker’s pay ordinarily includes commission, his or her salary should not be reduced to basic pay in periods following annual leave because he or she has been unable to earn commission while on annual leave. This will obviously have repercussions for businesses, such as recruitment companies, where a large proportion of pay is commission.
The details: Mr Lock received a basic salary, plus regular commission payments based on sales. During his annual leave, he was paid his basic salary, plus any commission payments that were due during that period for previous sales. However, in the months following his holiday Mr Lock received less pay because of course he had not made any sales during his annual leave. He brought a claim in the ET for outstanding holiday pay which then referred the matter to the ECJ. In late 2013, the Advocate General ruled that Mr Lock should have received pay during his annual leave that reflected the commission he would have earned had he not taken annual leave, even though it might be payable sometime after his holiday was over. It said that the commission payments were intrinsically linked to Mr Lock’s role as a salesman and therefore should form part of his normal remuneration.
The ECJ has now confirmed this opinion. It said that if Mr Lock’s holiday pay did not taken into account commission payments, he “may be deterred from exercising his right to annual leave” (though in this case he took his annual leave, but was claiming for additional holiday pay).
So what does this mean for recruitment companies? Commission can make up a significant element of a successful recruitment consultant’s pay and so recruitment businesses need to consider this judgment. Unfortunately the ECJ did not set out how Mr Lock’s holiday pay should be calculated, and has left this to the UK courts to decide. It did, however, suggest that this meant assessing notional commissions by use of a reference period long enough to be “representative” of what his earnings from that period would probably have been.