Changes to holiday entitlement and holiday pay were introduced in January 2024 as part of the Retained EU Law (Revocation and Reform) Bill, and came into force for holiday periods starting in April 2024.
While employers with annual leave schemes commencing in April 2024 should have already applied the new legislation, those operating annual leave on a calendar year basis will need to prepare ahead of the changes impacting them from January 2025.
These changes aim to simplify the process, though some argue they add complexity.
Understanding the key changes
Definitions for irregular hours and part-year workers
The new regulations introduce clear definitions for irregular hours and part-year workers. Irregular hours workers are employees whose paid hours vary significantly from one pay period to another, such as those on zero-hours contracts. Part-year workers are those who work only part of the year with periods of at least a week where they are not required to work and are not paid, like seasonal workers.
Statutory holiday entitlement
There is now a new method for calculating statutory holiday entitlement for irregular hours and part-year workers. This method ensures that holiday entitlement is accrued fairly based on the actual hours worked, addressing previous inconsistencies. It is calculated at 12.07% of actual hours worked in a pay period, based on the 5.6 weeks statutory minimum holiday entitlement.
Rolled-up holiday pay
Rolled-up holiday pay is now an option for irregular hours and part-year workers. This means that holiday pay can be included in the worker's regular pay, simplifying the process for both employers and employees.
Meanwhile, the current rates of holiday pay are maintained under the new regulations, despite a unified approach across the UK:
4 weeks paid at the normal rate
1.6 weeks paid at the basic rate
Normal remuneration
The reforms also provide a clear definition of 'normal remuneration' for the 4 weeks of statutory annual leave. This ensures consistency and fairness in holiday pay calculations, addressing ambiguities that previously existed.
Provisions for calculating leave accrual for workers who take maternity or family-related leave or are off sick are also being introduced. This ensures these workers are not disadvantaged and receive fair holiday entitlement.
Practical steps for employers to ensure compliance
1. Review and update contracts
Employers must ensure that their contracts accurately reflect the working patterns of their employees to determine their classification under the new regulations. It is crucial to review and, if necessary, update contracts and payroll systems to comply with these changes.
2. Liaise with payroll providers
Employers should work closely with their HR teams and payroll providers to understand the impact of the new regulations and ensure effective implementation of the new holiday pay calculations. This collaboration is essential to maintain compliance and avoid potential legal issues. Payroll software can usually support tracking leave entitlement and can usually provide average pay reports, but may have limitations for variable hours depending on the historical data held and component levels identified.
It should be noted this falls under employment law, and not PAYE legislation. However, payroll will play its role in making the payments where appropriate to employees but cannot provide legal advice.
3. Produce average pay reports
For employees with variable hours, produce average pay reports using at least 52 weeks of historical data. If no payment was received in a week, you can go back up to 104 weeks. For workers employed for less than 52 weeks, use the number of weeks they have worked to calculate average pay.
4. Communicate Changes Clearly
Inform employees about any changes to holiday pay and entitlement. Clear communication is key to ensuring employees understand the new regulations and how their holiday pay and entitlement will be affected.
5. Seek professional advice
Employers who are unsure about how the new regulations will impact their business should seek professional employment law advice. This is particularly important to ensure compliance and avoid potential disputes.
Navigating holiday pay changes
While the aim of the new UK holiday pay regulations was to simplify the process, employers must take proactive steps to ensure compliance. By updating contracts, coordinating with HR and payroll providers, and communicating clearly with employees, businesses can navigate these changes effectively. For further guidance, employers should seek professional advice to fully understand the impact of the new regulations.
For more information or an informal discussion, contact Karen Thomson at karenthomson@armstrongwatson.co.uk or call 0808 1445575.
