Underpaying holiday pay? State enforcement is on its way

The government has launched a consultation which sets out it preferred approach. We set out what employers need to know.

What is the Fair Work Agency?

The Fair Work Agency (FWA) is a newly established UK enforcement body created under the Employment Rights Act 2025. It consolidates the functions of several existing state enforcement bodies, including the HMRC National Minimum Wage unit, the Gangmasters and Labour Abuse Authority, and the Employment Agency Standards Inspectorate. 

The FWA was set up to provide a more coordinated and efficient approach to enforcement of key employment rights and is designed to act as a single point of contact for workers and employers.

What is the rationale for the state enforcing individual holiday pay claims?

The government believes that the numbers of employers who are not correctly paying their staff holiday pay is ‘significant’. It cites evidence that 2.2 million jobs did not receive any annual leave in 2025. Despite this only a small percentage of workers bring claims in the employment tribunal for non-payment or underpaid holiday pay. 

It takes the view that many workers face barriers to enforcing their rights through individual routes and the state should step in to fill the gap. This will benefit workers:

• because the FWA will be able to recover arrears more quickly than going through the tribunal system; and
• impact a wider group of workers because the FWA will be able to consider whether the entire workforce is being properly paid.  

What elements of holiday pay will the FWA enforce?

The FWA will only enforce holiday pay that a worker is entitled to under the Working Time Regulations 1998. This includes:

• underpayments
• non-payments; and
• incorrect calculations including where an employer has refused leave, or refused to carry-over leave. 

It won't enforce non-payment of additional contractual leave and workers will have to pursue this in the normal way. 

How will the FWA enforce non or underpayment of holiday pay?

The government says that the FWA will operate under a framework that is ‘fair, proportionate and effective’ for workers and employers. It recognises that holiday pay calculations are complex and says it will provide the tools and guidance needed to help employers get this right. 

The FWA will work with employers to help them understand their obligations and will ‘provide opportunities for employers to correct any underpayment rather than moving straight to punitive enforcement action’. 

Where this doesn't work, the FWA will be able to take direct enforcement action - including: 

• investigating claims and carrying out pro-active inspections of businesses; and
• issuing notices of underpayment and imposing financial penalties on non-compliant employers.

How much can the FWA order an employer to pay?

The FWA will be able issue a notice of underpayment representing the difference between what an employer has paid a worker and the amount they should have paid them. That money will go to the worker.

In addition, it will be able to issue civil penalties to employers responsible for those underpayments. The government suggests that civil penalties should should mirror the penalty regime under the NMW: 

• A penalty of 200% of arrears per worker, reduced to 100% if paid within 14 days
• A maximum penalty of £20,000 per worker - only payable where there has been a sustained period of underpayment; and
• A minimum penalty of £100 per case (which could include multiple workers) to act as a deterrent against making small underpayments.

Employers will only be able to challenge a civil penalty by applying to an employment tribunal.

The government is also considering imposing a cap on the maximum arrears an employee can recover via enforcement action by the FWA to disincentivise higher paid staff from going down this route. That's because it wants the FWA to prioritise enforcing the rights of lower paid workers as it believes they are more likely to have their rights infringed and less likely to have the means to pursue holiday pay claims via a tribunal. 

How far back will the FWA be able to go?

The FWA will only be able to enforce underpayments during the ‘claim period’. The government believes this should be six years. 

However, it will only be able to enforce claims from 18 December 2025 (the date the ERA 2025) came into force - even if the non or under-payment started earlier than that. 

The consultation seems to suggest that if the situation arose before 18 December 2025, but continued beyond that date, the FWA would not enforce any parts of the worker's claim. If that's correct, it will disadvantage many workers who have been unpaid for years, but remain working for the same employer.  

Will workers have to pay a fee before the FWA will look into their complaint?

No. Workers won't have to pay the FWA and businesses won't have to fund legal representation unless they choose to.

Will workers still be able to issue personal claims in the tribunal to recover holiday pay?

Yes. Enforcement by the FWA won't replace a worker's right to make a claim in an employment tribunal. But, they won't be able to recover the same arrears from both a tribunal and the FWA. 

A tribunal may stay a claim that is being investigated by the FWA.

What are the main risks to businesses once this is in force?

It may open a can of worms. Despite reforms to holiday pay which came into force in 2024, calculating holiday pay remains complex and it can be easy to make mistakes. 

If the FWA targets your business, it has the legal right to enter your premises and inspect your records. If it finds that you have done something wrong, it will expect you to repay underpayments and change your calculations to ensure that you don't make further mistakes. If you don't pay up, it will issue a penalty and you'll only be able to challenge that in an employment tribunal.

But, perhaps the most worrying aspect, is that the FWA may also check to see if you are also complying with other employment law breaches - such as underpayment of NMW, even if it hasn't received any complaints about this. 

How to respond

The consultation closes at midnight on 22 September 2026. You can respond here.

The government is unlikely to make any fundamental changes to its proposals. However, we recommend that you look at the section which discusses what resources you'd like the government to provide to help you correctly calculate the holiday pay of your staff (questions 16-18). It is considering providing:

• a more detailed calculator or self-assessment tool to help employers and workers work out holiday entitlement and holiday pay
• specific scenarios and worked examples to illustrate how holiday pay law could apply in specific circumstances
• a chatbot or digital assistant to help users navigate holiday pay support interactions with the FWA
• webinars delivered by the FWA to explain holiday pay entitlements, employer obligations and how the compliance and enforcement regime will operate; and
• more consolidated and centralised guidance on the FWA and/or Acas web pages to make information simpler to find and easier to understand. 

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