Holiday pay entitlement

The Retained EU Law (Revocation and Reform) Act 2023 became law in June, setting out how EU-based laws are to be treated in future.

Most employment law will continue to stand, giving employers some certainty, but one immediate priority for reform is the calculation of holiday entitlement and pay, as the Government is keen to simplify calculations.

Under current regulations, most people are entitled to 5.6 weeks of holiday a year, or the equivalent pro rata, made up of four weeks of EU regulated leave and 1.6 weeks of domestic regulated leave.

Problems arise because the two entitlements have different rules for calculating pay.  For the four weeks of EU leave, calculations must include bonus or overtime payments, and generally this cannot be carried over into a new holiday year.

But under the domestic provision, only basic rate payment is required for the 1.6 weeks of holiday pay, and this holiday can be carried over with written agreement.

“We don’t know yet whether the government will decide that all pay should be at full rate for the whole 5.6 weeks, including payments such as bonuses, commissions and overtime, or at the basic rate,” explained employment law expert Esther Marshall of Mullis & Peake solicitors.

“Unfortunately, one side or the other is likely to be disappointed.  Employers may be focused on the potential burden of additional costs if the calculation results in an uplift, but equally there may be staff disputes if the outcome translates as less in pay packets.”

The other proposal to simplify holiday pay is by using rolled-up holiday pay, by which workers receive their holiday pay every working week through an extra percentage on top of their earned pay, instead of when they take time out for holiday. Presently, this is not allowed and holiday pay must be paid when taken.

Esther added:  “On the positive side, some employers may find that this could simplify holiday calculations for irregular hours but, if implemented, it will require contracts and payslips to be updated.

“The other issue with rolled-up holiday pay is that can lead to workers not taking time out because they struggle to budget for holiday times without income.  This can have a negative effect if workers suffer stress and burnout through a lack of downtime, so it may require a system to ensure everyone takes their annual leave.”