Businesses in Retail, Leisure and Hospitality need to urgently review their holiday accrual and pay practices in light of new legislation

New regulations on holiday pay and entitlement came into force on 1 January 2024. It was hoped that the new rules would simplify the law in this area. However, the new rules aren’t straightforward and employers now have new issues to work through. 

What are the new rules?

In summary, the new rules:

• Create a new class of workers: irregular hours and part-year workers (“Regulation 15F workers”)*
• Create a new method of accruing holiday for Regulation 15F workers*
• Allow employers to roll-up the holiday pay of Regulation 15F workers*
• Set out new carry-over provisions i.e. how much holiday can be carried over from one holiday year to the next and in what circumstances (relevant to all workers from 1 January 2024)
• Set out a new definition of normal pay, confirming what payments need to be included when calculating holiday pay e.g. commission etc. (relevant to all workers from 1 January 2024)

*applies to holiday years that begin on or after 1 April 2024.

How will these changes impact employers in the Retail, Leisure and Hospitality sectors?

Employers who engage casual and seasonal staff will need to consider if these workers meet the new definition of a Regulation 15F worker, or not. 

In particular, the following types of workers risk being captured by the new definitions (depending on individual facts):

• Zero hours workers
• Casual workers with a fixed number of minimum hours who work a larger number of flexible hours in addition to those fixed hours
• Workers with fixed hours who pick up ad hoc overtime which exceeds their fixed number of hours
• Seasonal workers

This is a non-exhaustive list. If a worker does meet the new definitions, employers will need to apply new rules on holiday accrual and pay or risk underpayments (more below).

There are also new rules setting out what payments must be included in holiday pay. These rules apply to all workers (not just Regulation 15F workers). This includes (but is not limited to) payments such as overtime and commission. In addition to this, the new rules cast some uncertainty over whether items like an annual performance-related bonus or a car allowance should be included in holiday pay. This will depend on individual circumstances and employers will need to take advice, or risk underpayments.

Employers also need to understand new rules relating to carry-over of holiday which apply to all workers. 

What do employers need to do if a worker does qualify as a Regulation 15F worker?

Employers will need to apply new rules to these workers in terms of holiday accrual (how much holiday the worker can take), holiday pay and carry-over.

Under the new rules, holiday accrual is calculated as 12.07% of actual hours worked in a pay period (i.e. how often they are paid). In addition, there are also new rules on how to calculate holiday pay. Namely, two options: 

• Option 1: pay holiday pay at the time the worker takes their holiday; or
• Option 2: work out how much holiday the worker has accrued each time you pay them and add an extra amount to their pay to reflect holiday pay (i.e. rolled up holiday pay).

If an employer wrongly classifies a worker, this risks underpayments and claims. And, because of the new rules relating to carry-over, there's now a greater risk that employees could bring claims going back much further than before. Therefore, it’s going to be important to take advice to understand any such risks and liabilities.

What should employers do next?

• For holiday years that begin on or after 1 April 2024, employers will need to urgently assess their workforce to consider who is a Regulation 15F worker and who is not. This task isn’t going to be straightforward - the definitions set out within the new rules are far from clear and, in some cases, employers will need to take a pragmatic view on how best to categorise workers until we receive further clarification from the courts and tribunals (which could take some time). 
• The government have also issued guidance alongside the new rules, which is non-statutory and therefore non-binding. Whilst this guidance is intended to provide further explanations and example calculations to support employers in calculating holiday accrual and pay, this lacks clarity and contains calculations that are at odds with the legislation. 
• Where a worker does meet the definition of a Regulation 15F worker, employers need to be clear on how to calculate holiday entitlement and pay under the new rules and update payroll accordingly to avoid underpayments.
• Contracts will need to be updated to reflect the new methods of holiday accrual and pay (including rolling-up holiday pay where relevant). This will likely involve a consultation process with employees (and unions, if applicable).
• For all workers, employers will need to check that the correct payments are being included in holiday pay calculations to comply with the new rules (and avoid claims). Furthermore, employers will need to understand the new rules on when holiday can be carried over from one year to the next and ensure policies and contracts reflect these changes. Again, contracts will need to be updated and this may require consultation.

How we can help

Our experts in the Retail, Leisure and Hospitality sector can:

• support you to review your current contracts and assess who is a Regulation 15F worker and who is not. This includes options and a risk-based approach where there are uncertainties in the law
• confirm the practical steps you need to take to be compliant with the new rules, including amending your contracts of employment
• advise you on the risks of any claims and how to mitigate these.

For more information, please contact our expert Charlotte Rees-John.

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If an employer wrongly classifies a worker, this risks underpayments and claims. And, because of the new rules relating to carry-over, there's now a greater risk that employees could bring claims going back much further than before. Therefore, it’s going to be important to take advice to understand any such risks and liabilities.”