‘Rolled-up’ holiday pay and new rules on working out who’s owed what – we explain the key changes
Significant reform to the way holiday entitlement and pay are calculated come into force on 1 January 2024 and will affect most employers and many employees.
Following a major consultation on which EU rules to keep and which to discard, the government has introduced ‘rolled-up’ holiday pay – unlawful since 2006 – for workers with irregular hours or part-year contracts.
This means the UK’s 1.6 million workers on temporary contracts and as many as four million workers who have irregular, non-repeating work patterns, could see their annual pay appreciably boosted.
In another significant development, the government has also decided there must be a new system for calculating holiday pay to include overtime and commission.
What is ‘rolled up’ holiday pay?
It’s where employers pay workers a sum of money on top of their normal hourly rate to represent their holiday pay entitlement rather than paying them holiday pay when the holiday is actually taken.
Under EU legislation, and therefore affecting the UK, this has been against the law since 2006 due to fears it could deter workers from taking leave if they felt they could earn more holiday pay by staying at work.
Although 45% of respondents to the government’s consultation were against rolled-up holiday pay, the government has decided to go ahead.
Ruling it out as an option for full-time members of staff, the government said there were ‘still clear benefits’ to business and to workers in bringing in the system for part-time workers, those with irregular hours and some agency staff.
What must be included in holiday pay calculations?
Going forward, and in line with existing EU case law on holiday pay and thus effectively writing it in to UK legislation from 1 January 2024, workers will still have a minimum entitlement of four weeks at normal pay and 1.6 weeks at basic pay.
The ‘normal’ rate of pay must be calculated to include the following:
- Payments, including commission payments, that are intrinsically linked to the performance of tasks a worker is contractually obliged to carry out.
- Payments for professional or personal status relating to length of service, seniority or professional qualifications.
- Payments, like overtime payments, which have been paid regularly to a worker in the 52 weeks leading up to the calculation for holiday pay.
What do employers need to do about the new holiday pay rules?
With the ban on rolled-up pay now over, employers who use a significant number of part-year, irregular hours and seasonal workers should find the changes make holiday pay calculations simpler.
However, it’s a good time to review your policies and procedures to ensure they meet the new regulations.
It’s also important to check which workers are paid overtime, commission and allowances as part of their normal pay so that you can be sure their holiday pay is being paid correctly.
What should employees do now?
If you think you have been underpaid holiday pay, or any of your wages, you may be able to make a claim to an employment tribunal.
Please contact our specialist Employment Team to find out what your next steps are.
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