Preparing for new HR laws: Holiday pay changes

After the Supreme Court made it illegal to pro-rata holiday entitlement for certain types of workers, this ruling caused a lot of issues.

It made us reexamine what a ‘fair allowance’ to leave and pay looks like – and sparked big disagreements.

In a bid to fix the problems, the government changed the rules again and these came into effect on 1st April 2024.

To make sure you’re clear on what these new rules are and who they impact, here’s everything you need to know…

What were the old holiday rules and why did they cause issues?

In July 2022, the Supreme Court ruled that you could no longer pro-rata holiday entitlement and pay for permanent part-year staff (more on that here).

They banned using the 12.07% method (we’ll come back to this later) to calculate accrued leave and pay for these types of workers. This meant these workers had to accrue leave in the same way as a standard full-time employee.

As a result, this gave all workers the same entitlement to 5.6 weeks of holiday a year – even if some had only worked a few weeks of it. Naturally, this sparked concerns over holiday pay.

Because of the ruling, businesses had one universal way of calculating holiday pay for their full time, part-year, and irregular hour staff. So in practice, someone who had only worked a few weeks of the year could receive the same amount of holiday pay as someone who had worked all weeks of the year.

Because of these disparities and grievances over unfairness, the government now says…

You can pro-rata again from April 2024

For leave years on or after 1st April 2024, you will be able to once again pro-rata holiday entitlement. But you can only do this for permanent part-year and irregular hour staff.

And if you are going to pro-rata, you’ll need to apply the 12.07% method.

The idea behind the 12.07% method:

Everyone has a legal entitlement to 5.6 weeks of annual leave a year. But people who don’t work full-time get this allowance in proportion to the hours they work. To break it down, there are 46.4 working weeks in the year (on the basis of 52 weeks minus 5.6 weeks).

5.6 weeks is 12.07% of 46.4 weeks.

To find out how much holiday your worker is entitled to, you’d need to figure out what 12.07% of the hours they’ve worked in the pay period is.

That way, your worker’s holiday entitlement is directly proportionate to how much time they’ve spent working.

Now that resolves the issue of entitlement - what about pay?

You have two options when paying these workers for their holidays…

You can pay them at the time they take their holiday

You could pay your permanent part-year and irregular hour staff at the time they take their holiday.

If you do this, you should pay your worker based on the average pay they’ve received over the last 52 weeks. You can find their average pay by looking at their average weekly earnings and ignoring any weeks they didn’t get paid. (You can go back a maximum of 104 weeks to get the 52 weeks you need to find your average if you need to.)

You can pay them rolled up holiday pay (now a legal practice)

Previously, it was illegal to pay permanent part-year and irregular hour workers ‘rolled up holiday pay’.

Under the rolled up method, you could pay your staff an extra amount of money on top of their hourly wage as holiday pay. So staff received their wage and holiday pay at the same time.

However, using rolled up holiday pay is now legal (for irregular hour and part-year workers only). So, now you will be able to use this method for leave years on or after 1st April 2024. You can do this by adding an extra 12.07% of their total pay for the work they’ve done in the pay period on top of their wages.

Note: if you are using rolled up holiday pay, you would need to clearly set this out in your worker’s pay slip. And if you are making changes to how you currently pay them and the amount of holiday they get, you will also need to have them agree to the change in writing.

You have new holiday carryover rules

In certain circumstances, workers can carry over holiday into the next leave year. That’s if they were in a position where they were unable to use their holiday allowance during the year.

The government relaxed these carryover rules during the Covid pandemic. So where employees couldn’t practically take their leave because of covid-related reasons, they were able to carry over four weeks of leave into the next two leave years.

These temporary rules ended on 1st January 2024. And now, normal carryover rules apply. So if your staff had any leave they were carrying over under these old rules, they must have taken this by 31st March 2024.

Now, workers can only carry over leave into the next leave year if:

• They were on long-term sick leave.

Then, they can carry over up to four weeks of leave into the next one and a half leave years.

• They were on maternity leave.

Then, they have a right to carry over the full statutory minimum 5.6 weeks into the next leave year.

In any other circumstances, you don’t have to allow staff to carry over leave. That’s as long as you’ve them a reasonable opportunity to take leave, encouraged them to take leave and warned them of the risks of losing their entitlement.

Get extra support managing new holiday rules

Understanding the rules around holiday entitlement is tricky – so if you have any questions at all, don’t hesitate to get in touch for a free consultation. Our HR experts are on hand to guide you through the new rules if this affects any of your staff (just book in below).