Holiday Pay. Issue 2, Care England - Savings Solutions, and Sustainability

Holiday Pay

The importance of getting it right

Holiday Pay for irregular hours and part-year workers in the care sector and beyond is notoriously complicated. Catherine Meenan, Associate at Weightmans LLP, outlines the law surrounding holiday pay for these workers and explains the changes which could make the thorny issue of holiday pay easier for employers.

Who knew holiday pay could be such a controversial and complex issue? The social care sector requires a fluid workforce to help manage fluctuating demand for services which may arise for a variety of reasons, including covering sickness and holiday absence and turnaround of staff.

To help with flexible working patterns which are essential to recruit and retain care workers, care providers are used to hiring ‘irregular’ hours workers and ‘part-year’ workers. However, offering flexibility comes with the challenge of trying to work out holiday entitlements and holiday pay accurately and in accordance with the law.

In this article, we will take you through the latest changes to holiday pay law and explain how providers can ‘save money’ if they effectively manage the process and understand each employee’s working pattern.

In recent years, in the wake of complex UK and European case law, the calculation and payment of holiday pay has given rise to significant challenges for employers. The case law, which we will summarise

briefly below, has introduced uncertainty, complexity, and an administrative burden on employers. This, in turn, has given rise to claims against employers for unpaid holiday pay.

As a result of the uncertainty, the Government launched two consultations in 2023 to review various elements of holiday pay. In this article, we explore:

• A brief history of the law on rolled up holiday pay and the calculation of holiday pay for part year and irregular hours workers.

• The results of Government consultations on rolled up holiday pay and the calculation of holiday pay for part year and irregular hours workers.

• What businesses in the care sector and beyond need to do to ensure compliance and reduce the risk of claims.

Definitions of irregular and part-year workers

The definition of irregular hours workers could apply to some agency workers, casual workers, and zero hours workers, all of which are common working arrangements in the care sector. The legal definition is set out in the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 as follows:

'(a) a worker is an irregular hours worker, in relation to a leave year, if the number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable;

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'(b) a worker is a part-year worker, in relation to a leave year, if, under the terms of their contract, they are required to work only part of that year and there are periods within that year (during the term of the contract) of at least a week which they are not required to work and for which they are not paid.'

It was, historically, the usual practice for employers to calculate and pay holiday pay for those workers on flexible contracts in the following (simple) way:

• Holiday pay was calculated by paying workers on flexible contracts 12.07% of their remuneration for work done in each pay period (the Percentage Approach). The benefit of the Percentage Approach was that holiday pay was broadly proportionate to the amount paid to full-time workers.

• Holiday pay was paid on a ‘rolled up’ basis. (Rolled up holiday pay [RHP] is where a worker receives an enhancement [12.07% of pay] with every payslip to cover their holiday pay, as opposed to receiving holiday pay only when they take annual leave.)

However, this changed due to a number of decisions on holiday pay. The issue of rolled up holiday pay was referred to the European Court of Justice; a 2006 legal case concluded that rolled up holiday was unlawful on the basis that the practice disincentivised taking leave.

In July 2022, the Supreme Court handed down its judgment on Harpur Trust v Brazel. This case concerned the calculation of holiday pay and entitlement of a permanent part-year worker on a zero-hours contract. The judgment held that the correct interpretation of the Working Time Regulations 1998 is that holiday entitlement for part-year workers should not be pro-rated so that it is proportionate to the amount of work that they actually perform each year. Part-year workers are entitled to 5.6 weeks of statutory annual leave calculated using a holiday entitlement reference period to determine their average weekly pay, ignoring any weeks in which they did not work. As a result of this judgment, part-year workers are now entitled to a larger holiday entitlement than part-time workers who work the same total number of hours across the year.

There were challenges in this approach in that it led to potentially complicated

calculations for employers trying to calculate average weekly pay.

However, the Government is keen to address this disparity to ensure that holiday pay and entitlement received by workers is proportionate to the time they spend working. At its extreme, for example, the case meant that an exam invigilator on a ‘permanent’ contract throughout the year, but who only worked a couple of weeks in the year, could be entitled to 5.6 weeks’ holiday, payable in accordance with average weekly earnings.

The Government Consultation

In view of the impact of the Supreme Court decision on sectors that engaged irregular and part-year workers, the Government announced two consultations: one addressing the calculation of holiday entitlement and another addressing (amongst very many other things) rolled up holiday pay.

As the Consultation on the calculation of holiday pay recognised, ‘Over time, holiday pay and entitlement legislation has become complex and, in some cases, can be challenging for employers to follow due to changes in case law’.

The outcomes of the two consultations were published jointly. Of relevance to the calculation of and rolling up of holiday pay, the following changes were announced:

(a) Rolled up holiday pay for irregular or part-year workers will be permitted. This is conditional on holiday being calculated on the basis of the Percentage Approach, the holiday pay being paid at the same time as pay for work done, and holiday pay must be itemised on the payslip. There are different rules applying to the payment of rolled up pay for those workers on statutory leave and on some kinds of family-related leave.

(b) Holiday pay for part-year and irregular hours workers for holiday years from April 2024 can once again be paid in accordance with the Percentage Approach. This has the effect of accruing payment for annual leave as the worker works, instead of being based on pay in the previous 52 weeks worked.

The draft statutory instrument came into force on 1st January 2024. The changes will come into effect on 1st April 2024 for those holiday leave years starting on or after that date.

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How do the proposed changes affect your costs?

The option of paying and calculating holiday pay in this simplified way for part-year/ irregular hours workers has been largely welcomed by employers. In large part, the changes simplify processes to be followed by employers and, crucially, for most employers, will reduce the amount of holiday pay due to part-year or irregular hours workers. If applied correctly, the reforms should also mitigate risk of unpaid holiday pay claims.

To save this money, and mitigate the risk of these claims, we would suggest you take the following steps:

1. Identify workers who are entitled to holiday pay

The new regulations do not change the requirement to pay workers holiday pay. However, it is always worth ensuring that workers who are entitled to holiday pay are receiving it. Otherwise, you risk potentially sizeable, backdated unpaid holiday pay claims.

2. Transparency is key Transparency around the calculation and timing of holiday pay payments is key. Make sure to clearly set out a separate payment for holiday pay on payslips. It can be categorised as ‘Holiday Pay’ or, very often, ‘WTD’ (for example, Working Time Directive). It would also be helpful, in agreements and/ or policies and/or in other communications, to explain the method of calculation of holiday pay adopted.

If you do not itemise holiday, you run the risk of an employee arguing that they have not received any holiday pay at all.

3. Encourage workers to take leave

Just because holiday pay can now be rolled up and no longer has to be paid at the point a worker takes holiday, that does not mean that workers can work without taking any holidays.

Employers still bear the burden of making sure that workers take their holiday, and it is important as part of an employer’s duty for the health and safety of its workforces that its employees take the appropriate breaks.

We would suggest including a provision to this effect in a (signed) contract and

reminding workers at regular intervals (via the Intranet for example) to take their leave.

4. Conduct a review of relevant agreements/policies

Following Harper v Brazel, many (though not all) employers changed their holiday pay payroll calculations. For many, these changes were also reflected in policies and/or contracts with part-year or irregular hours workers.

If you were one of those employers, and choose to revert to the Percentage Method, you will need to change your payment practices and communication of that pay.

Before communicating this change, however, we would suggest reviewing how many people will be affected by the change and what the relevant contracts and policies say. It will be important that any change in the calculation of holiday pay is not contradicted by any relevant contract/policy.

Beware that if the way in which you pay holiday pay is set out as a contractual term, or if the contract/agreement does not permit you to amend or vary the terms of the agreement, you may have to seek to agree to the change with workers or, alternatively, unilaterally agree the change. Although unusual amongst irregular/ part-year workers, it is always worth checking whether there is a union that will need to be consulted on the changes.

Creating a sustainable workforce

The development of holiday entitlement and holiday pay has evolved significantly over the years. The impact of the Harpur Trust v Brazel Supreme Court Decision had an adverse impact on those employers who engaged irregular hours and part-year workers, including the care sector. The solution offered by the Government following its Consultations should assist employers in determining the correct level of pay simply without the need for complex calculations which will ultimately create savings and make the workforce sustainable.

If you would like further information in relation to holiday pay law and/ or would like to ask our expert team your questions, do get in touch with Weightmans LLP by emailing: catherine.meenan@weightmans.com