Holiday pay consultation signals change

In May I welcomed the UK government’s new approach statement that put an end to the 31 December 2023 cliff-edge freefall of all European Union-derived (EU-derived) employment and case law. Instead, only specific pieces of EU-derived legislation would cease to exist from 1 January 2024. 

Yet, a consultation issued around the same time (retained EU employment law reforms) looked at four changes:

1. the requirement to record working time
2. the calculation of holiday leave and pay
3. the re-introduction of rolled-up holiday pay
4. reform of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), which would be UK-wide.

All the above are derived from the time that the UK was part of the EU and the proposals are designed to ensure that reforms are “tailored to the needs of the UK economy”. To complete the story, on 8 November 2023, the UK Government published its consultation response – in fact, only the TUPE reforms will apply UK-wide, most only applying in Great Britain.

The consultation also discusses other issues such as the accrual of leave in the first year of employment.

1. Recording working time

The European Court of Justice (ECJ) ruling in Federación de Servicios de Comisiones Obreras (CCOO) vs Deutsche Bank SAE, said employers needed to record the daily working hours for each worker to comply with the EU’s Working Time Directive (which gave us the Working Time Regulations).

But, this was never placed into legislation and the UK government described this as “high cost” in their consultation. Most respondents agreed there should be no requirement because of this 2019 case law ruling – probably because they did not realise they had to and weren’t doing it anyway!

By way of draft regulations, Part 3 will amend the 1998 Working Time Regulations to specify what records the employer has to keep. This is positive and clarifies a situation that, perhaps, was unclear.

From 1 January 2024, the Working Time Regulations (in Great Britain) will be specific in that there is no requirement to record daily working hours. They will also be updated to say the employer must keep the following for workers – records that will show compliance with:

• the maximum hours in a working week (48 unless the worker has opted out)
• the maximum hours in a working week for a young worker (eight hours per day/40 hours)
• the maximum hours for a night worker (in the pay reference period, an average of eight for each 24 hours
• the obligation not to use young workers for night work
• the obligation to offer health assessments.

However, these were already obligations, but now there is the obligation to keep information in an “adequate” way to show compliance in a way they see fit.

Compliance with the national minimum/living wage is not mentioned in the Working Time Amendment Regulations but is already a requirement, and this is not removed.

2. Holiday leave and pay

We are looking at amending the Working Time Regulations that apply to workers in Great Britain. There is not a similar intention to amend the same regulations in Northen Ireland, indeed, the UK government has devolved this responsibility and no longer has the power to legislate on this devolved issue. 

The current holiday leave and pay entitlements in Great Britain are as follows.

1. Four weeks’ annual leave derived from the EU Working Time Directive and known as Euroleave. This is paid at the value of the pay an employee would normally receive and is the block that has been subject to much case law – for example, the requirement to include elements such as overtime and commission
2. 1.6 weeks’ annual leave derived from the Working Time (Amendment) Regulations 2007. This is paid at the value of a “week’s pay”, as per the definition of the Employment Rights Act 1996. This has not been the subject of case law rulings.
3. “Over-and-above leave”, as prescribed in a contract of employment, which also may prescribe the rate at which it is paid.

Points 1 and 2 are statutory entitlements, while 3 is a contractual entitlement.

So, there are three different types of leave, accompanied by three different rates of payment.

Do employers make the differential, indeed, do employers recognise there are three types? Further, even if they do, can software accommodate three different calculations (on the assumption that employers are telling the system “This is five days of Euroleave” and “This is two days of UK leave” for example)?

The consultation proposed that the two statutory leave entitlements (Euroleave and UK leave) were merged into one single pot of 5.6 weeks. This seemed perfectly sensible. For payment, the consultation asked how the leave payment should be calculated.

On 8 November 2023, the UK government published its responses document and Part 2 of the (draft) regulations contain the legislative provisions. I was surprised to see that 65% of respondents disagreed with the merge proposal (with only 16% in agreement or strong agreement). So, I was not surprised that the UK Government said: “It will not at this time be introducing a single annual leave entitlement with a single rate of pay.”

The three leave types remain! Obviously, I was in the minority 16% that thought merging blocks 1 and 2 would be simple. However, maybe this reflects the fact that employers (and workers) don’t realise that 5.6 weeks is actually 4 + 1.6.

There are some clarifications.

1. The provisions in the Working Time (Coronavirus) (Amendment) Regulations 2020 are removed from 1 January 2024. These regulations allowed Euroleave to be carried forward into the following two leave years where the worker was unable to take it for a Covid-19-related reason (sickness, restrictions and so on). No new leave can be carried forward and any leave that has been carried forward must be taken before 31 March 2024.
2. For leave years starting on and after 1 April 2024, Euroleave (the four weeks) can be carried forward into the following leave year where the worker cannot take it because of taking another statutory leave (maternity or adoption for example). The UK leave (the 1.6 weeks) can already be carried forward if there is an agreement in place.
3. For leave years starting on and after 1 April 2024, Euroleave (the four weeks) can be carried forward where it is untaken because of sickness. However, it must be used within 18 months. As above, UK leave can already be carried forward.

Of course, things are different for workers who are irregularly paid or are part-year workers, however, the above concepts remain.

I was hoping there would be some consolation with regard to the rate at which the leave blocks would be paid (the 4 + 1.6). But I was not lucky in that area either.

The (draft) Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 will come into force for pay calculations for leave years commencing 1 April 2024. There will still be three blocks, however, the legislation will prescribe the rates of pay for block 1 (the four weeks Euroleave), taking into consideration the EU case law (which only ever applied to the four-week Euroleave anyway).
For employers and workers

There are still three blocks and there are still three different rates of payment.

There is no change to the following.

• There are no changes to the pay calculation for the statutory 1.6 weeks, which is still payable at the value of a week’s pay, as per the Employment Rights Act.
• There are no changes to the “over and above” calculation that the employer can choose to pay at whatever rate suits them. For example, the employer may give the worker an additional three days of leave between Christmas and New Year, paying at, say, basic salary only.

The four weeks Euroleave now has a prescribed definition of “normal remuneration”. This is designed to reflect the case law. To confuse matters, this will be known as the value of a week’s pay as per the Working Time Regulations, not the value of a week’s pay as per the Employment Rights Act!

Quoting directly from the draft legislation (which mirrors the consultation responses document), a week’s pay as per the Working Time Regulations is:

• payments, including commission payments, intrinsically linked to the performance of tasks that a worker is contractually obliged to carry out
• payments for professional or personal status relating to length of service, seniority or professional qualifications
• payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation.

So, think “intrinsically linked, status and regular”.

Now it is over to employers to decide how to operate this, remembering that the payments must be at least the statutory. It’s like the National Minimum Wage. Legislation prescribes a minimum hourly rate for work but if the employer chooses to pay over this then that is fine.

Then, once the employer has decided, it’s over to software developers to facilitate this. Remember, though, software will only ever be able to give the right results if the right information is entered. So, for a payment as per the Working Time Regulations (the four weeks), you will have to know whether the worker is taking this leave type and you will have to tell the software. I have never experienced software that calculates different pay for different leave types, simply because we do not tell the software (or know ourselves) what type of leave the work is taking.

I feel that the consultation and the responses have highlighted even more that there are three different blocks all payable at three different rates. Remember that the initial consultation sought to “reform and where we could remove unnecessary bureaucracy” including “simplifying annual leave and holiday pay calculations in the Working Time Regulations”.

I don’t think the UK government has achieved that objective at all!

Next time, Ian Holloway will look at the re-introduction of rolled-up holiday pay and reform of TUPE.