News & Insights

Calculating holiday allowance for employees who work irregular hours can be tricky.  In an effort to simplify things, and in response to developments in both UK and EU case law, the government has recently introduced changes to the rules on holiday rights.

The recent changes aim to simplify the rules on holiday entitlement and pay, specifically addressing potential unfairness from a Supreme Court decision that had previously awarded more holiday to term-time workers than their full-year counterparts working the same annual hours.

It’s important to comply with these new regulations. Understanding the benefits and knowing how and when to take advantage of them is crucial for ensuring fairness and compliance.

What are the new rules?

Many of the new regulations simply clarify existing requirements, but there are some significant new rules. For example:

• Employees have the right to carry over holiday into the next holiday year if they have been unable to take it due to sickness or family-friendly leave, or if they have been denied the right to take leave, or if they were not told that they would lose their holiday if they did not take it before the end of the holiday year.
• Employers much include payments such as overtime and commission in calculating holiday pay, although for some workers this does not apply to the full annual leave entitlement.
• New definitions have been provided in respect of an ‘irregular hours worker’ and a ‘part-year worker’.
• The ability to accrue holiday entitlement at 12.07% of actual hours worked in a pay period has been reintroduced for irregular hours workers and part-year workers.
• A new mandatory method for calculating holiday entitlement while off sick or on family-friendly leave has been introduced for irregular hours workers and part-year workers.
• The option to pay ‘rolled-up holiday pay’ to irregular hours workers and part-year workers has been reintroduced. This means that an additional sum for holiday, calculated at 12.07% of normal pay, can be paid to the worker instead of calculating average pay.

Ensuring compliance

While the changes do provide some clarity and simplify some areas, holiday rights remain complex. Now is a good time to take stock and ensure that you are compliant, for example by determining which payments are included in holiday pay calculations and over what period of time the average is worked out. A worker can bring an employment tribunal claim for past shortfalls in holiday pay.

Advantages of the new rules

The option to pay rolled-up holiday pay to irregular hours and part-year workers is simpler than calculating holiday pay based on average pay over the previous 52 weeks.

Given the complexities of alternative methods, many employers continued to use rolled-up holiday pay for casual and zero-hours contract workers even though it was technically unlawful. Where employers are able to use the new rules, this will remove the possibility of being challenged for paying rolled-up holiday pay.

How and when to take advantage of the new changes

Employers wishing to adopt the rolled-up holiday pay option can only do so:

• where the worker meets the definition of irregular hours worker or part-year worker. Some casual workers, zero-hours workers, agency workers, and hourly-paid term-time workers are likely to fall within the definitions – but this will depend on the wording in their contracts and the exact working arrangements; and
• in relation to holiday years starting on or after 1 April 2024. This means for workers whose holiday year runs 1 January to 31 December, the changes for irregular hours and part-year workers only come into effect on 1 January 2025.

Now is a good time to assess if you can and wish to use the new rules. We can support you in taking steps to implement the changes. Remember that this may involve changes to contracts, which usually involves the worker’s agreement.

Practical steps for employers

It is important to:

• check policies, contracts, and practices to ensure that they are compliant;
• identify any workers who are likely to fall within the definitions of irregular hours or part-year workers and decide if you wish to pay rolled-up holiday pay;
• identify and introduce any contractual changes that need to be made to be compliant or to introduce rolled-up holiday pay;
• adjust payroll systems to process the accrual of holiday in hours for irregular hours and part-year workers and payments;
• ensure payslips itemise the element of rolled-up holiday pay; and
• set up systems to remind employees to take their annual leave and make it clear that they must ‘use it or lose it’.

How we can help

While the changes go some way to simplifying the rules on holiday entitlement and pay, they also bring in differences between the rules that apply to irregular hours and part-year workers and those that apply to other workers, for example overtime payments and allowances should be included in calculating holiday pay. Another area of complexity is ‘carry forward’: there are variations in the amount of holiday that can be carried forward and for how long, depending on the circumstances.

To support you, we can:

• set down the detail in clear and concise holiday policies;
• assess your additional payments to staff, such as commission and overtime and advise on which you need to include in calculating holiday pay and when;
• advise you on which workers come within the new definitions of irregular hours or part-year workers;
• check contract wording to ensure it is compliant;
• advise you on implementing contractual changes, to avoid breaching contracts; and
• draft new contracts to maximise the chance that those workers and new workers come within the new definitions so you can pay rolled-up holiday pay.

For further information, please contact one of our Employment experts.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.