Policy and research technical lead The Chartered Institute of Payroll Professionals
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Holiday pay and entitlement changes impact employers

Samantha Mann considers the effect that the recent change to reference periods for calculating holiday entitlement has had on employers.

21st Oct 2020
Policy and research technical lead The Chartered Institute of Payroll Professionals
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Samantha Mann considers the impact that the recent change to reference periods for calculating holiday entitlement has had on employers.

In the Taylor Review of Modern Working Practice, one of the recommendations was for the need to reform holiday pay entitlements, to create a fairer system for workers employed flexibly, by extending the reference period from 12 to 52 weeks.

6 April 2020

Since 6 April 2020, the reference period in use has been 52 weeks. Where a worker has been employed for less than 52 weeks, the reference period becomes the number of weeks for which the worker has been employed.

From 6 April 2020 a cap has been introduced, to limit how far back employers need to travel to obtain 52 weeks’ worth of pay data, which is two years, or 104 weeks.

Challenges

Prior to the introduction of the EU Working Time Directive, that in turn, led to the introduction of the Working Time Regulations, contractual entitlement governed an employee’s right to paid leave. This continues to have an ongoing effect on compliance with the Working Time Regulations, as legacy systems impact how employers face the challenge, and cost, of administering holiday pay.

At a recent CIPP think tank roundtable, payroll professionals and software developers met, together with officials from BEIS (Department for Business, Energy and Industrial Strategy), to discuss how the 52 week reference period was affecting them.

Whilst there are advantages to employers of having a 52-week reference period, the use of a period of time that spans a week continues to be a challenge for many employers, not least because their pay periods are monthly.

In a world that increasingly looks to technology to provide solutions, collecting weekly hours and earnings data to enable payroll systems to calculate holiday entitlement and pay accurately provides a problem that has yet to be overcome consistently for all employers. Challenges include:

  • Employers operate different processes (many based on legacy contract agreements)
  • Time lag between hours worked and those processed for payment
  • Work patterns quite often get dealt with outside of payroll (eg HR)
  • Difference in reference points e.g. payroll traditionally look to when the payment becomes liable to PAYE income tax, which, for the purposes of holiday pay will not mirror when the hours are worked and earned
  • Staying up to date with the impact of case law. There have been many high profile cases that impact the calculation of holiday pay, which include what pay elements to include and how working patterns impact entitlement such as the recent case of The Harpur Trust v Brazel, which considered the validity of the use of the 12.07% multiplier for calculating holiday entitlement where an employee is a ‘part year worker’.

This list of challenges could be longer and even allowing for the gov.uk calculator that seeks to help workers calculate their entitlement, problems continue to be raised.

Cost

The 52-week reference period came about as a result of Taylor’s assertion that there was a driver for poor employers to abuse the system: “Having a large workforce of people on zero hours contracts who do not take all their annual leave can be worth a significant amount of money to a business.”

Additional costs are expected to be incurred as a result of this change due to the fact that:

  • The longer reference period will include more pay periods which will result in higher holiday pay
  • Technology hasn’t yet been able to provide a consistent solution to simplify the collation and calculation of holiday pay for all employers and so there is still a widespread reliance on excel spreadsheets to maintain accurate records – the more weeks covered the more time is needed to be taken to maintain accurate records
  • Understanding the rules and the impact of case law – staying up to date with the latest guidance and understanding it, and ensuring that all stakeholders e.g. employees, line managers, clients are updated, is costly
  • Additional costs incurred by software developers such as payroll, HR, self-serve, will be passed on to customers

On the Horizon

A Single Enforcement Body (SEB) that brings together the three main employment enforcement bodies, HMRC NMW, the Gangmasters and Labour Abuse Authority and the Employment Agency Standards Inspectorate was the subject of a consultation in 2019. In addition to bringing together these bodies, the consultation also considered that once formed, the SEB could become responsible for ensuring state enforcement of holiday pay for vulnerable workers.

We await the outcome of this consultation with interest, as the current challenges that face employers on the subject of holiday pay will need to be addressed, if we are to avoid employers being identified as non-compliant due to ignorance of the law and guidance, as we see so often with NMW.

The CIPP is running a survey that seeks to gather evidence relating to the costs incurred by employers and their agents in delivering recent changes affecting employment rights, specifically holiday pay and the requirement to detail hours on payslips.

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