New holiday pay provisions - regulations in need of reform

Author: Darren Newman

The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 were intended to simplify the calculation of holiday pay and entitlement following the UK's departure from the EU. But they seem to have brought as much confusion as clarity. Darren Newman provides some guidance.

When we initially left the EU, there was no real impact on the way in which employment law worked. Under the 2018 European Union (Withdrawal) Act, all of our EU-derived laws stayed in place and they continued to be interpreted in the same way. Our courts continued to look at the Directives on which they were based and how those had been interpreted by the European Court of Justice (ECJ). They continued to interpret domestic law in order to comply with those Directives - even to the point of effectively inserting whole new provisions into our own Regulations in order to achieve that.

EU law no longer supreme

That was particularly so in the case of the right to annual leave and holiday pay. For some years now we have been used to the idea, for example that workers who are off sick can carry over untaken annual leave into the following holiday year and that regular overtime should be included in the calculation of holiday pay. This is despite the fact that a straight reading of the Working Time Regulations 1998 would prevent the carry-over of annual leave and exclude overtime from the calculation of holiday pay. EU law took precedence and so the Regulations were interpreted to comply with rulings from the ECJ.

That position changed following the passage of the Retained EU Law (Revocation and Reform) Act 2023. Since the start of 2024, EU law has no longer been supreme and so it seems that we can no longer just apply decisions of the ECJ that are not consistent with domestic law. This had the potential to throw the whole area of annual leave and holiday pay into doubt. Would we have to go back to square one and litigate those issues all over again? The Government was keen to stress that the purpose of the Act was not to undermine rights that were already in place and so new Regulations have been issued aimed at ensuring continuity - while also taking advantage of the fact that we are no longer bound by EU law, to create some additional flexibility for employers.

New areas of doubt

The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 are not an easy read. The Government claimed when introducing the Regulations to Parliament that they were intended to simplify the calculation of holiday pay and entitlement. That, however, is a hopelessly optimistic view. Far from simplifying the right to holiday pay, the new Regulations create whole new areas of doubt and uncertainty that have the potential to lead to years of further litigation.

Take, for example, the issue of what payments are included in the calculation of holiday pay. The basic principle derived from the decisions of the ECJ is that for the four weeks of annual leave required by the Directive, a worker's "normal" pay should be maintained. The new Regulations accordingly provide that holiday pay for those four weeks (and not the 1.6 weeks' additional leave that workers are also entitled to) should include "payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract".

Careless drafting

But there is no requirement here that the payments in question should be part of the worker's normal pay or even that they should be regular. The Regulations go on to provide that the employer should work out a weekly average of those payments based on the previous 52 weeks for which the worker has been paid. So one annual bonus payment, provided it is "intrinsically linked" to the tasks the worker is employed to perform (whatever that means), would be averaged out over 52 weeks and included in the first four weeks of the worker's holiday pay. That is not how most employers have hitherto been calculating it.

The Regulations also provide that holiday pay (for the four weeks of normal annual leave) should include "other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date". These payments need to be regular to be included - but there is no indication of what that means. Nor is there any suggestion that these payments need to be linked in any way to the employee's work. An employee may regularly receive payments to cover their expenses. It would be bizarre if those payments had to be included in holiday pay, but that does seem to be what this provision says.

It is very concerning that these new Regulations should cast so much doubt on holiday pay calculations simply through the carelessness of the drafting.

Two new categories of workers and further uncertainty

Another area of uncertainty is around the creation of two new categories of worker - irregular hours and part-year workers. These groups do not get 5.6 weeks' annual leave as other workers do. Instead, they accrue annual leave in each pay period at a rate of 12.07% of the hours they have actually worked. Their holiday pay is then an average of their total remuneration in the previous 52 weeks of work. Since their entitlement is so different, it is obviously important to know just who falls into those categories.

Again, however, the carelessness with which the Regulations have been drafted leads to ambiguity. An irregular hours worker is someone whose paid contractual hours are "wholly or mostly variable". What on earth does "mostly variable" mean? If a worker has a guaranteed working week of 35 hours but is also required to work up to 12 hours' overtime every week, are their hours "mostly variable"? Most of their weekly hours are fixed, but the number of hours they work each week are undoubtedly variable. Do we need to wait for the courts to determine what the definition actually means?

A problem of definition

There is even confusion about part-year workers. The guidance issued by the Government originally said that someone will not be a "part-year worker" if their salary is paid throughout the year in equal instalments. For them to be counted as a part-year worker they would need to "not receive pay" during periods when they were not working. But this did not reflect what the definition actually says: a part-year worker is someone who has periods of time - of at least a week - in the course of a leave year during which they do not work and for which they are not paid. The contracts of term time-only employees - even where salary is paid throughout the year - are usually very clear that, while an employee might be paid during the school holiday, they are not being paid for that time.

It appears that the Government now agrees with this analysis. On 1 April (seriously) the guidance was amended to say that a salaried term time-only worker would indeed qualify as a part-year worker if it was clear that there were weeks for which they were not paid. This new version of the guidance is probably more accurate, but it does seem to indicate that the Government accepts that the Regulations do not reflect its original intention.

There are always potential ambiguities with new legislation, but the scale of the issues raised by these Regulations is unprecedented in my experience. If they are left in place they will cause needless litigation for years to come, with employers in the meantime being unable to tell whether or not they are complying with the law. This is surely unacceptable. It is important to recognise that these problems cannot be solved by more or better guidance. Guidance is no substitute for clear, properly drafted legislation. These Regulations need to be amended because in their current form they are just not good enough.