How the retail, leisure and hospitality sector can prepare for upcoming changes to holiday entitlements

Over the last year, the government have been working on reforming the law relating to holiday entitlements and published new draft regulations earlier this month. The Employment Rights (Amendment, Revocation and Transitional Provisions) Regulations 2023 (the regulations) will come into force on the 01 January 2024 and will impact most employers. This blog will look at the changes the regulations will make and focus on how these will impact the retail, leisure and hospitality sector.

Introduction of ‘part-year workers’ and ‘irregular hours workers’

The regulations provide for two new classes of workers, namely ‘part-year’ and ‘irregular hours’ workers. 

Businesses in the retail, leisure and hospitality sector may want to pay particular attention to irregular hours workers. These are workers whose working hours are ‘wholly or mostly variable’ in each pay reference period, which is inclusive of zero hours workers and similar casual hours contracts, which may make up a significant portion of their workforce. 

1. Holiday entitlement 

Under the regulations, irregular hours and part-year workers will accrue holiday at a rate of 12.07% of the hours worked in each pay period in their first, and in subsequent years of employment. Their entitlement will stay in proportion to the number of hours they work but is subject to a maximum of 28 days per year.

The new approach means that these types of workers will accrue their holiday as they work, rather than being provided with their entire holiday entitlement at the beginning of the holiday year. However, it is important that businesses honour whatever approach they have agreed in their existing contracts. Therefore, if you have contracts with this class of worker which state that they are entitled to their entire holiday upfront, this should be honoured. If this is the case, businesses may wish to amend their contracts to reflect this new method. However, if their contracts are silent on this, they will maintain the discretion to decide whether workers are entitled to book more holiday than they have accrued so far within that year. 

Whilst these regulations come into force in January, these provisions will not be immediately effective, and businesses will only be able to apply these methods for leave years beginning 01 April 2024. Until these changes come into force, you must calculate the holiday pay and entitlement of term-time workers under the existing, Brazel compliant, rules as claims could still be made in relation to that. We suggest you take legal advice on this to minimise your exposure to potential claims.

It is also important for businesses to remember that if they provide comparable full-time members of staff with additional paid contractual holiday in excess of 5.6 weeks, they must ensure their part-year workers receive the same entitlement, pro-rated to reflect the number of weeks they actually work per year to avoid claims under the Part time Workers (Prevention of Less Favourable Treatment) Regulations 2000. 

      2. Rolled up holiday

Regulation 16A provides employers with the ability pay their workers an additional amount on top of their hourly pay to reflect their holiday pay. With each hour the worker has worked, they will receive a 12.07% increase of their total hourly pay as a top up, which aims to reflect the holiday they have accrued during their pay period. 

Whilst there is no obligation to roll up holiday, if a business chooses to, it is important that they do so in a manner which is compliant with the formalities provided in the regulations, that the staff members are eligible for it, and that their worker’s contract remains compliant with section 1 of the Employment Rights Act 1996, referencing rolled up holiday. They must also ensure that pay slips clearly detail the amount they have paid for accrued holiday, which must reflect the hours they have worked. 

     3. Accrual of leave during periods of illness and other statutory leave 

Regulation 15C provides businesses with the correct way to calculate holiday for this class of workers during periods when they are absent due to sickness or any other type of statutory leave.

The correct calculation will be multiplying the average number of hours worked per week during the ‘relevant period’ (52 weeks) by 12.07%. This figure will then need to be multiplied by the number of weeks or absence, excluding weeks where the worker is on sick leave or statutory leave but including those weeks where they were not required to work.

Changes which will apply to all members of staff

The new regulations do not only deal with irregular hours and part-years workers but will also introduce rules which will impact all members of staff. These rules include changes to holiday pay and new rules relating to rolling over holiday from one leave year to the following. 

1. Holiday pay 

Under the current rules, employees are generally entitled to 5.6 weeks of holiday. This time derives from two separate forms of holiday, the first comes from EU law and provides employees with 4 weeks’ leave and the second is an additional 1.6 weeks leave from UK law. 

These two forms of holiday pay are calculated differently. The 4 weeks of EU leave are calculated at a normal rate, whereas the additional 1.6 weeks are calculated at a basic rate. Put simply, the normal rate includes overtime and bonuses in its calculation, whereas basic pay does not.

Initially, the government wanted to introduce a single annual entitlement of 5.6 weeks in its new regulations, and it was uncertain at which rate this would be calculated. Nevertheless, the government has decided against this merging of holiday entitlements and has instead codified the current position. However, the exact method of calculating the ‘EU entitlement’ is not yet absolutely clear, with the regulations stating that the calculation for the 4 weeks must include:

• Payments that are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract.
• Payments relating to professional or personal status relating to length of service, seniority or professional qualifications.
• Other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

The lack of a definition of both ‘regularly’ and ‘intrinsically linked’ within the regulations means businesses will need to consider how courts have approached these questions in the event of a dispute.

Overall, the draft regulation seeks to maintain the current position, meaning businesses need not change their current calculations of holiday pay, provided that their current calculations include the normal rate for the 4 weeks and the basic rate for the extra 1.6 weeks as a minimum. Some businesses may find it easier to calculate the entire 5.6 weeks at the heightened normal rate to avoid miscalculations and backpay claims however, the new regulations do not require this. 

      2.Holiday roll over 

The regulations have also provided some clarity regarding rolling holiday over from one leave year to the following. Under the new regulations, all workers are entitled to roll over their entire 5.6-week entitlement if they have been unable to take their holiday due to family leave. 

However, workers will only be entitled to carry over the 4 weeks ‘EU entitlement’ out of the full 5.6 weeks if the reason for them being unable to take their leave is illness. If a worker carries this holiday over, they will be required to take that period of leave within 18 months from the end of the leave year it accrued. Business may benefit from the implementation of this rule as it prevents workers who have been on an extended period of leave due to sickness from accruing lots of holiday entitlement which would have to be paid upon their termination. 

Additionally, workers will be entitled to carry over 4 weeks of their leave in circumstances where: 

• They have not had a ‘reasonable opportunity’ to take it or have not been ‘encouraged’ to take it.
• They have not been told by their employer that if they do not take all their leave that they will lose whatever entitlement remains. 
• If they have been wrongly treated as self-employed and haven't been given paid leave.

To reduce roll over of leave within your business, you should ensure that your employment contracts include provisions that state that the 4 weeks ‘EU entitlement’ must be taken first. 

Next steps for employers 

Employers should start considering these upcoming changes and whether they may need to update their leave policies and contracts to ensure that they remain compliant. It is especially important for businesses to review their contracts if their workers are paid overtime or commission, to ensure that their holiday pay reflects this. If you think you may have underpaid your part-year or irregular hours workers, we can help you to minimise the risk of claims. Please contact our holiday pay specialist Jenny Arrowsmith to find out how we can help you.

Finally, it is important to remind and encourage your workers to take their holiday entitlements as to avoid them carrying over unused leave entitlement.