Holiday pay calculations – changes on the way

Now the UK has exited the EU, the Government plans to remove aspects of the Working Time Regulations, Holiday Pay regulations and the Transfer of Undertakings (Protection of Employment) Regulations.

As a result, the Government is consulting on “The Retained EU Law (Revocation and Reform) Bill” which aims to strengthen the framework of rights afforded to UK workers and businesses. This includes proposals for significant changes in the way holiday entitlement and holiday pay must be calculated by employers.

Single annual leave entitlement

Currently, all UK workers are entitled to 5.6 weeks of paid annual leave each year. This leave entitlement is broadly granted under the Working Time Regulations which are split into two allocations:

• 4 weeks under EU Working Time Directive; and
• 1.6 weeks under UK Working Time Regulations.

Unhelpfully for UK businesses, these two sets of allocations could be paid at differing rates of pay.

The Government’s first proposal is to create a single annual leave entitlement of 5.6 weeks and set out the minimum rate that holiday pay should be paid at. Our clients have historically expressed frustration at the difficulties presented by the contrasting positions reflected in the respective EU and UK regulations. By aligning the annual leave entitlement for all workers in the UK, it will help finally clarify the position for UK employers and ensures workers receive holiday entitlement that is equitable and proportionate.

Introducing rolled-up holiday pay

Several high-profile holiday pay cases have materially impacted how UK employers are expected to calculate holiday pay. The Government is aware of the difficulties this now presents to employers, particularly when calculating holiday pay for individuals performing variable hours working - this is the second consultation on the issue this year.

The Government is proposing to legislate the lawful practice of ‘rolled-up holiday pay’ for employees performing variable hour working (previously the was deemed unlawful following an ECJ ruling in 2006). Operating rolled up holiday pay enabled employers to pay holiday pay as an enhancement to a worker’s pay at the time that the workers performed their duties, instead of when they are on holiday.  

This pay practice enabled employers to fairly compensate their employees in industries where it is challenging to schedule regular time off or where the nature of the work makes it difficult to take paid leave. While the proposal would allow for rolled up holiday pay to be paid this way, there is room for improvement in the proposal which simply states:

 “holiday pay should be paid at 12.07% of a worker’s pay on each payslip”.

Implications for employers

As it stands, the single annual leave entitlement proposal will give rise to additional wage costs to employers of complying with these new proposals. It is hoped that these costs will be offset by the time costs saved by employers who will no longer be required to automatically or manually calculate their employees’ holiday based on differentiating treatment between EU and UK days.

Requiring employers to pay holiday pay on each payslip is a rigid way to allow for rolled-up holiday pay arrangements. We have argued for more flexibility for employers to implement appropriate holiday pay schemes that work for their organisation and workforce: for example, to allow the practice of rolled up holiday pay banking, distributed on the employee’s request or at regular intervals.

BDO have raised our concerns with the draft proposals in our response to the Government – read the full consultation here. 

 

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