Holiday pay and entitlement: New regulations shake up retail, leisure, and hospitality sector

The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (“the Regulations”) came into effect on 1 January 2024, making significant changes to holiday pay and entitlement for workers across all sectors– including the retail, hospitality, and leisure sectors.

Although the aim of the Regulations was to simplify the law in this area, the Regulations are complex and create whole new areas of doubt for employers.  Ultimately, these uncertainties will have to be determined by the courts. This may take some time. Until then, employers will have to take a pragmatic approach.

Alongside the Regulations, the government has also published guidance (“the Guidance”). This contains more detail about the changes and example calculations.

In this guidance note we will explain the key changes to the law and identify areas where the law isn’t clear. We will consider five key areas:

• New class of worker: “Regulation 15F” workers
• New method of holiday accrual for Regulation 15F workers
• Holiday pay for Regulation 15F workers including the ability to roll-up holiday pay
• New carry-over provisions (applying to all workers) and
• What has to be included in holiday pay (applying to all workers).

1. NEW CLASS OF WORKER: REGULATION 15F WORKERS

As a first step, you will need to assess whether your workers qualify as a Regulation 15F worker ornot. For employers in the retail, leisure and hospitality sector, this will be particularly relevant for seasonal or casual workers (as these are the types of workers who risk being captured). It’s important you get this right. If you wrongly classify a worker, this risks underpayments and claims. Because of the new rules relating to carry-over, there’s now a greater risk that workers could bring claims going back much further than before.

The meaning of “irregular hours workers” and “part-year workers” are set out at regulation 15F and we refer to these workers as “Regulation 15F workers”. 

Existing staff

If you already employ the worker, you need to look at their existing contract terms and consider whether these accurately represent the reality of the relationship.

New staff

You will have to decide whether a new member of staff meets this definition at the outset of the relationship and make sure that their contract reflects this.

You can only apply these new rules for Regulation 15F workers whose holiday year begins on or after 1 April 2024.  If your holiday year follows the calendar year e.g. 1 January to 31 December, you will not be able to introduce these changes until 1 January 2025.  The date your leave year begins will be as set out in the worker’s contract of employment or holiday policy.

Who is an irregular hours worker?

A worker is an irregular hours worker, in relation to 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.

Each pay period means how often the worker is paid e.g. weekly, monthly. Unfortunately, neither the Regulations nor the Guidance explains what ‘wholly or mostly variable’ means. Therefore, it is open to interpretation. This could mean where more of the worker’s hours are variable than are fixed in each pay period (but this isn’t clear). 

The following types of workers risk being captured by the definition (depending on individual facts):

• Zero hours workers
• Casual workers with a fixed number of minimum hours who work a larger number of flexible hours in addition to those fixed hours
• Workers with fixed hours who pick up ad hoc overtime which exceeds their fixed number of hours

This is a non-exhaustive list.

It isn’t clear from the Regulations or the Guidance whether or not a worker with fixed or regular hours who works additional ad-hoc overtime will be considered an irregular hours worker. The Guidance suggests that a worker with fixed hours who works ad hoc overtime could be an irregular hours worker but, in our view, this is too simplistic and shouldn’t be relied on. It’s difficult to see how someone who, for example, is contracted to work 39 hours a week, but only works a few hours of overtime each week, will meet the definition because the number of hours they work aren’t “wholly or mainly variable”. 

We suggest that you consider the number of hours the worker is required to work under the terms of their contract. If this number is likely to exceed any additional overtime they do, they will not qualify as an irregular hours worker. You should look at what the contract says and then consider the pattern of hours they’ve done previously to try and make an assessment. You should make a note of your rationale and keep it on file in case the worker challenges their status at a later date as it will help you to demonstrate that your original decision wasn’t a sham.

Workers engaged on zero hours contracts are likely to be considered as an irregular hours worker, even if in reality they work the same number of hours most weeks or months. However: 

• the contract should reflect the reality of the arrangement. For new staff, you need to determine that at the outset. We recommend that you make a note of your thought process, as above.
• If you have existing staff engaged on zero hour contracts that work the same number of hours each week or month, you should consider amending the contract to reflect the reality of their working relationship with you.

Where a worker has more than one contract with the same employer, the Regulations require you to determine whether they meet this description by looking at both contracts “in the round” to determine whether or not they are wholly or mostly variable.  There isn’t an option, for example, for employers to treat one contract under the “normal rules” and another contract under Regulation 15F.

Given the lack of clarity in the law and the likelihood that this will depend on individual circumstances, we recommend that you take legal advice to determine which of your workers will be an irregular hours worker.  

Who is a part-year worker?

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.

For example, a seasonal worker who is only working and being paid during spring and summer months, or the festive period. A term-time only worker would also likely be captured by this definition, even in circumstances where their pay is averaged and paid over 12 months (which can be a common arrangement for some term-time workers).

Again, we would strongly recommend that you seek advice to assess whether a worker is a part-time worker or not based on individual circumstances. 

Misclassifying workers

If you incorrectly categorise a worker as a Regulation 15F worker and calculate their holiday entitlement using rules that apply to this category of worker, they will be able to bring a claim against you under the WTR if they have received less holiday (and therefore pay) than they would otherwise have been entitled to.

Under new provisions relating to carry over, any member of staff who has not received the correct amount of holiday, or holiday pay, can carry over those claims subsequent holiday years.  They are not subject to the two-year limitation that applies to claims brought under the Employment Rights Act 1996 as a series of unlawful deductions. 

This means that claims can, potentially, go back many years.  It is therefore important that you review the workers who may be impacted before deciding on the approach you wish to take.

1. NEW ACCRUAL RULES FOR REGULATION 15F WORKERS

The Regulations set out a new method of accrual that only applies to Regulation 15F workers.  These workers don’t have a fixed entitlement to annual leave at the beginning of each leave year.  Instead, their leave accrues over the course of the leave year and the amount of holiday they receive depends on how many hours they have actually worked in each pay period (i.e. how often they are paid).  That figure is then multiplied by 12.07%. The accrual method is subject to a cap of 28 days – which represents 5.6 weeks leave.

Example: Jill works irregular hours and is paid monthly. Her leave year starts on 1 April 2024. She is entitled to the statutory minimum holiday entitlement only.

In June, she works 68 hours. To work out how much holiday she accrues in June, you will need to calculate 12.07% of 68 hours. Jill accrues 8 hours of holiday during the month of June.

Note: the hours should be rounded up or down to the nearest half hour (e.g. down if it is less than 30 minutes, but will be rounded up if it is 30 minutes or more than 30 minutes).

Employers often offer more than 5.6 weeks holiday. If your organisation provides additional holiday you will need to adjust the 12.07% figure to reflect this. You should take advice to ensure you get this right.

The Regulations provide for holiday to accrue during periods of sick leave or family related statutory leave (such as maternity leave). However, you must apply a different accrual method during these periods of leave (and this is set out in the Regulations). 

HOLIDAY PAY FOR REGULATION 15F WORKERS

For Regulation 15F workers, you have a choice about how to pay holiday pay to these workers:

• Option 1 is to pay them when they take a holiday. 
• Option 2 is to work out how much holiday they have accrued each time you pay them and add an extra amount to reflect their holiday pay - this is known as rolled up holiday pay. 

Paying holiday when they take it

The Regulations require you to:

• Work out the worker’s average rate of pay over a 52-week period (or whatever data you have if they haven’t worked for you for a year or more). You exclude weeks where they didn’t receive any pay or where they were on statutory leave (such as maternity leave).
• Once you have this information you need to calculate the average hourly rate of pay and multiple this by the number of hours holiday the worker is taking.

However, if the worker receives a fixed hourly rate of pay which doesn’t vary, you could multiply their hourly rate by the number of hours holiday they wish to take.  You will need to factor in any changes to the hourly rate (such as an increase in the National Minimum Wage), so if you adopt this method, you will end up paying a slightly higher hourly rate than you would have done using the averaging provisions. Although this approach is technically incorrect, it does have the advantage of being simple to calculate and the worker will not be underpaid so there is a low risk that they will bring a claim against you.

Rolling up holiday pay 

Rolled-up holiday pay allows you to add an additional amount to an worker’s pay to cover holiday pay, rather than paying holiday pay at the time when they take leave.

Based on a statutory entitlement of 5.6 weeks, 12.07% is added to the worker’s total pay in the pay period. For example, if a monthly paid worker has earned £1,000 in the month, then their rolled-up holiday pay for that month will be £120.70 (£1,000 x 12.07%).

If you offer workers more than 5.6 weeks of holiday (i.e. in excess of the statutory minimum), then again you will need to update the 12.07% figure to reflect this. 

Special rules apply where a worker in receipt of rolled-up holiday goes on sick leave or statutory leave (e.g. maternity/family-related leave).

CARRY OVER PROVISIONS WHICH APPLY TO ALL WORKERS

The Regulations clarify when workers can carry-over leave from one year to the next.  These rules apply to all workers from 1 January 2024. We use the term “standard workers” to refer to any worker who isn’t a Regulation 15F worker.

The table below explains the new carry-over rules in relation to both standard workers and Regulation 15F workers – please note that slightly different rules apply to how much leave can be carried over. 

One key point to note - you now have a positive obligation to give each worker a reasonable opportunity to take leave and encourage them to do so.  The Regulations and Guidance do not define what “encouragement” means.  In our view, you will need to do more than including a “use it or lose it” clause in your holiday pay policy and/or the worker’s contract such as:

• Scheduling email reminders to all staff to take their annual leave well in advance of the end of the leave year; 
• Sending out individual emails to staff who have not booked sufficient leave as the end of the leave year approaches or asking line managers to have conversations with staff about this.

If you don’t encourage staff to take annual leave (four weeks in respect of standard workers and 28 days for Regulation 15F workers), it will carry over into the next leave year and potentially beyond that - until the worker is given the opportunity to take it.  You may, therefore, need to factor in payments for untaken leave from previous years on termination which could be costly.

WHAT HAS TO BE INCLUDED IN HOLIDAY PAY WHICH APPLIES TO ALL WORKERS

The original version of the WTRs requires workers to receive a “week’s pay” when they take a week’s holiday.  Historically, there has been much case law about what types of payments must be included when calculating holiday pay (e.g. overtime and commission). To avoid uncertainty about whether previously binding decisions about holiday pay would still apply post-Brexit, from 1 January 2024 the government has expressly set out the types of payments that must be included in holiday pay within the Regulations. These principles apply to all workers i.e. both standard workers and Regulation 15F workers.

Regulation 16 of the WTRs now expressly provides that holiday pay must include the following payments:

• Payments which are intrinsically linked to the performance of tasks that a worker is obliged to carry out under the terms of their contract (such as commission payments linked to personal performance);
• Payments for professional or personal status related to length of service, seniority or professional qualifications; 
• Other payments such as overtime, which have been regularly paid to the worker in the previous 52 weeks.

For standard workers, these rules in respect of Regulation 13 leave only (i.e. four weeks leave). For Regulation 15F workers these rules apply to all of their accrued leave. 

It’s not entirely clear whether the above list will be interpreted in the light of previous binding caselaw or if it goes further than that.  For example, “regularly” is not defined. Previous cases have determined that employers could exclude ad hoc overtime payments.  However, if overtime is worked a few times a year, it’s possible that will now be regular enough to count for the purposes of including this when calculating a weeks pay..

It’s also not clear if annual performance-related bonuses should be included in holiday pay, or not and this will depend on individual circumstances. You should take advice to assess any potential liabilities and risks.

It’s also important to note that this list sets out principles that apply.  It doesn’t detail all potential payments that you have to include when working out someone’s holiday pay.  You will still have to decide whether a particular payment fits within one of these three categories.

What should you do next: a step-by-step guide

• For holiday years that begin on or after 1 April 2024, you will need to assess your workforce to consider who is a Regulation 15F worker and who is not. We recommend taking advice to get this right.
• If a worker does meet the definition, you need to be clear on how to calculate holiday entitlement and pay under the new rules and update payroll to avoid underpayments.
• You will also need to update contracts of employment to reflect the new methods of accrual and pay for these workers. This will likely involve a consultation process with employees (and unions where applicable).
• For all workers from 1 January 2024, you will need to check that the correct payments are being included in holiday pay calculations to comply with the new rules (and avoid claims).

Finally, also from 1 January 2024, you will also need to check that your contracts and holiday policies reflect the new rules on carry-over and ensure that you are encouraging staff to “use it or lose it” (as above).

Further information 

Holiday pay is an extremely complicated area of law and has resulted in a huge volume of litigation. Given the types of workers engaged in the consumer sectors, it is going to be essential for these employers to familiarise themselves with the Regulations and Guidance to ensure compliance and avoid potentially significant liabilities. 

If you have any specific questions or concerns regarding the impact of these changes on your sector, please get in touch. Whilst this document will explain the key changes to the law brought about by the Regulations, it is not intended to be an all-encompassing guide to holiday entitlement and pay. 

This guidance note has been prepared on the basis of what is required by law at April 2024, what is good practice, and our understanding of issues common to your sector It may not be suitable for your circumstances and should not be considered a substitute for the advice of a lawyer. You agree you use this document at your own risk in these respects.