COMPLIANCE
I n a recent policy paper, ‘ Smarter regulation to grow the economy ’, the government announced its intention to introduce new employment legislation to help grow the economy following Brexit, the aim being to reduce red tape and drive innovation. In this article, we focus on the government’s proposals to simplify holiday pay calculations by reforming the Working Time Regulations. Existing legislation on holiday entitlement and pay can be complex, particularly for businesses employing workers with irregular hours. This is largely because it’s governed by European Union (EU) legislation and case law. Here, we set out the legislative reforms the government has proposed under its recent policy paper, and the changes which may emerge from the government’s recent consultation, following the Supreme Court (SC) decision in Harpur Trust v Brazel. “Existing legislation on holiday entitlement and pay can be complex, particularly for businesses employing workers with irregular hours” Merging the separate ‘basic’ and ‘additional’ leave entitlements into one annual leave entitlement The government proposes to create a single annual leave entitlement of 5.6 weeks for all workers. Currently, workers have two separate holiday entitlements, as set out in the Working Time Regulations 1998 (WTR): l 4 weeks’ annual leave derived from the EU’s Working Time Directive (‘EU leave’), and l a further 1.6 weeks’ leave under UK law (‘UK leave’). There are separate rules for calculating holiday pay, depending on whether you’re looking at EU leave or UK leave. For example, payments for regular commission, bonuses and overtime should be included in EU leave but not UK leave. It’s hoped that the government’s intention to combine EU leave and UK leave
as term-time only workers) cannot be pro-rated. This means they’re entitled to the same annual leave as their full-time counterparts and are in a better position than their part-time counterparts. The SC also decided that holiday pay must be calculated using the method set out in Section 224 of the Employment Rights Act 1996, emphasising that the commonly used 12.07% method for calculating holiday pay for workers with irregular hours is unlawful. The judgment in this case caused widespread confusion among businesses, affecting between 320,000 and 500,000 permanent term-time and zero-hours contract workers in the UK. In its recent consultation, the government sought views on reintroducing the 12.07% method to calculate holiday entitlement and pay for part-year and irregular hour workers so that it’s based on the hours actually worked, effectively reversing the Harper Trust v Brazel case. It also proposes to implement a 52-week reference period, including non-working weeks, to calculate leave entitlement. This would ensure a part-year worker’s holiday pay and entitlement is proportionate to the number of hours they work in a year. What does this all mean for employers? Ultimately, this is all positive news for businesses – particularly those which rely on casual or bank workers – as it should provide more clarity around holiday pay calculations and ensure workers’ holiday entitlement and pay fairly equates to the time they spend working. However, for the time being, the legal position remains as it is. This means employers must continue to use the method set out in Section 224 of the Employment Rights Act 1996 to calculate holiday pay for workers with irregular hours. A failure to comply with current holiday pay legislation could pose high financial risks on businesses, as underpayment of holiday pay could be pursued as a civil claim and could go back up to six years. There are no current timescales for when new holiday pay legislation will be implemented. However, we expect it could be approximately 12 months, as the government will need to pass secondary legislation to amend the Working Time Regulations. n
(which will presumably be subject to the same rules) will provide greater simplicity for employers calculating holiday pay entitlement for their workers. Permitting ‘rolled-up’ holiday pay The government proposes to re-introduce ‘rolled-up’ holiday pay to alleviate issues around holiday pay calculations for atypical workers. ‘Rolled-up’ holiday pay was commonly paid to workers with irregular working hours. Employers would ‘roll-up’ holiday pay into a worker’s normal pay – typically an additional 12.07% was applied on top of their normal hourly wage. This meant that, regardless of whether holiday had been taken by the worker in any given week or month, they’d receive an additional payment in each pay packet to cover their holiday pay entitlement. This practice has been held to be unlawful by EU law, as it could deter workers from taking their holiday, and therefore defeats the objective of the Working Time Directive. The government’s proposal to allow employers to ‘roll-up’ holiday pay is likely to be positive news for many employers engaging casual or zero-hour workers, as it will be easier for them to comply with holiday pay legislation, particularly following the Harpur Trust v Brazel case. This was also referred to in the government’s recent consultation on holiday pay, which we cover below. “The government’s proposal to allow employers to ‘roll-up’ holiday pay is likely to be positive news for many employers engaging casual or zero-hour workers” Earlier this year, the government launched a consultation on holiday entitlement and pay for variable hour workers, which closed on 9 March. It followed the recent SC’s decision in Harpur Trust v Brazel which held that holiday entitlement for part-year workers on permanent contracts (such Government holiday entitlement consultation
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| Professional in Payroll, Pensions and Reward |
Issue 92 | July 2023 - August 2023
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