Making sense of changes to the Working Time Regulations

On 1 January 2024, the Working Time Regulations were amended to reform holiday entitlement and holiday pay calculations. The changes include:

• Introducing an accrual method of calculating holiday entitlement for workers with irregular hours and part year workers;
• Introducing rolled up holiday pay;
• Defining “normal remuneration”.

Although the changes came in on 1 January 2024, the reforms relating to irregular hours and part-year workers only apply to leave years beginning on or after 1 April 2024, so if you use a calendar year as the holiday year, these changes will only apply from 2025.

There is government guidance available in relation to the legislative changes.

Section 1 - Holiday entitlement

Statutory provision

In England and Wales, workers are entitled to 5.6 weeks’ annual leave (28 days if working a 5 day week) which can be broken down into two separate holiday entitlements as follows:

• 4 weeks’ leave based on entitlement derived from EU law paid at ‘normal pay’ (13(1) WTR 1998)
• an additional 1.6 weeks’ leave based on UK law at ‘basic pay’ only. Referred to as ‘additional leave’ or regulation 13A leave (13A WTR 1998).

Points to note:

• A part-time worker is entitled to 28 days’ leave reduced pro rata according to the number of days worked.
• Similarly, an employee joining/ leaving part way through the year is has a pro rata statutory entitlement for that year.
• No minimum period of continuous service is required to be entitled.
• No part of regulation 13(1) leave can be carried over from one holiday year to the next (as far as the legislation is concerned). By contrast, regulation 13A leave may be carried over if this is provided for by the employee’s contract of employment.
• Statutory holiday is for “workers”, not just employees. Self employed individuals have no entitlement.

Part year workers / irregular workers

Historically, for workers with irregular hours many employers applied an accrual calculation of 12.07% to work out holiday entitlement.

The 12.07% was used because it is the statutory annual leave entitlement (5.6 weeks) expressed as a percentage of the number of potential working weeks in a year (52 – 5.6 = 46.4 weeks).

This then changed following the Supreme court case of Harpur Trust v Brazel. The case related to a music teacher working term time only. Her holiday entitlement was calculated on the basis of 12.07% of her worked hours. She brought a claim for unlawful deduction from wages in relation to holiday pay. She was initially unsuccessful, but the case went to the Supreme Court which concluded that part year workers were still entitled to 5.6 weeks leave. The result of the decision was that part year workers could receive disproportionately more leave than full year workers, but the court said the Working Time Regulations were clear and 5.6 weeks was a minimum.

The 2024 amendments to the Working Time Regulations effectively reverse this decision and legislate for a 12.07% calculation for workers with irregular hours / part year workers. The 12.07% is applied to the hours worked in a pay period.

For example:

• Jill works irregular hours and is paid monthly.
• In June she works 68 hours.
• The holiday accrued in June is:
  • Divide hours worked by 100 - 68/100 = 0.68
  • Multiply by 12.07 = 0.68 x 12.07 = 8.2076
  • Round up or down to nearest hour = 8

Under the Regulations irregular hours and part year workers are defined as follows:

“a worker is an irregular hours worker, in relation to a leave year, if the number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable.”

“a worker is a part-year worker, in relation to a leave year, if, under the terms of their contract, they are required to work only part of that year and there are periods within that year (during the term of the contract) of at least a week which they are not required to work and for which they are not paid.” 

For example: 

• Paul, has a rotating 2-week shift pattern where he works 15 hours in week 1 and 20 hours in week 2.
• Paul would not qualify as an irregular hours worker if his contracted hours are fixed during both week 1 and week 2. It is not the case that his hours worked are wholly or mostly variable. Instead, Paul’s hours are fixed (just worked in a rotating shift pattern).

The changes under the Regulations only apply for leave years starting on or after 1 April 2024.

Where a worker is absent due to sick leave or family related leave, the Regulations introduce a calculation for working out what leave would accrue during the absence. Employers need to look at a 52-week reference period ending the day before the sick / family leave starts and work out average hours worked. Any weeks where the individual is absent due to sick leave or family leave should not be included but other absences should be.

For these workers, the Regulations provide for the option of rolled up holiday pay using the 12.07% (see below).

Carry-over

The position prior to the 2024 changes was:

• The Regulations said the 4 weeks leave could not be carried over from one holiday year to another and the 1.6 weeks could be carried over if the parties agreed;
• Case law held that carry over was permitted in some circumstances but that it must be used within a certain period.

The new Regulations set out the right for workers to carry over holiday from one leave to the next in some situations and effectively codify the case law. Carry over is permitted as follows:

• Where the worker is unable to take some or all their leave as a result of taking a period of statutory leave (which includes maternity leave and other family-related leave) they can carry over up to 28 days.
• Where a worker is unable to take some or all of their leave as a result of taking a period of sick leave they can carry over up to 20 days. The carried over leave must be taken within 18 months of the leave year to which it relates.
• Leave can be carried over where in any leave year, the employer fails to:
  • Recognise a worker's right to annual leave or paid annual leave.
  • Give the worker a reasonable opportunity to take leave or encourage them to do so.
  • Inform the worker that leave not taken by the end of the leave year will be lost.

In such cases, the right to take the carried-over leave will last until the end of the first full leave year in which there is no such failure by the employer.

The legislation enabling workers to carry over holiday for two years in certain circumstances relating to Covid, was repealed on 1 January 2024. Any accrued holiday carried over under those rules needs to be used up by 31 March 2024.

Section 2 - Holiday pay

As above, the 4 weeks leave is to be paid at the worker’s “normal” rate of pay and the  additional 1.6 weeks can be paid at basic pay. This difference is not changing under the new 2024 Regulations. Many employers don’t distinguish between the two different rates and instead calculate all leave on the basis of normal pay because it is easier than trying to apply two different calculations.

Normal Remuneration (applicable to the 4 weeks leave)

The Working Time Directive states that workers must have the right to "paid annual leave", but does not specify how holiday pay should be calculated. In Robinson-Steele v RD Retail Service Ltd [2006] ICR 932, the ECJ held that workers must continue to receive their normal remuneration during their annual leave.

The ECJ expanded on this concept of "normal remuneration" in Williams v British Airways Plc (C-155/10) [2012] IRLR 948. It held that under the Aviation Directive (2000/79/EC), which contains provisions equivalent to those found in the WTD, a worker on holiday is entitled not only to basic salary, but also to remuneration which:

• Is "intrinsically linked to the performance of the tasks which the worker is required to carry out under his contract of employment and in respect of which a monetary amount, included in the calculation of his total remuneration, is provided".
• Relates to the "personal and professional status" of the worker. This would include payments relating to a worker's seniority, length of service and professional qualifications.

In Lock v British Gas Trading Ltd and others [2014] IRLR 648, the ECJ applied Williams to the WTD. It held that, where a worker's remuneration includes contractual commission, determined with reference to sales achieved, then holiday pay based on basic salary alone is contrary to the Directive.

The new Regulations codify retained EU and domestic case law in relation to the definition of “normal remuneration” for holiday pay purposes. A week’s pay for holiday under the new regulations now includes:

1. Payments, including commission payments, intrinsically linked to the performance of tasks which a worker is obliged under their contract to carry out.
2. Payments for professional or personal status relating to length of service, seniority, or professional qualifications.
3. Payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

This means that the following types of payments are likely to be included in holiday pay:

• Commission
• Performance / incentive bonuses
• Overtime
• Shift allowances

Bonuses which are not linked to performance would not be included. A grey area from the case law was the question of annual discretionary bonuses. Unfortunately, the Regulations have not clarified this point.

Basic pay

As mentioned above, “Basic pay” is applicable to the 1.6 weeks of leave.

The new regulations do not amend the definition of basic pay which is still the worker’s basic remuneration not including any additional payments such as, overtime, bonuses, or commission.

Rolled up holiday pay

Rolled-up holiday pay is when an employer pays a worker their holiday pay whilst the worker is working instead of when they are on leave. It is done by adding an extra percentage of pay onto the workers’ basic pay.

Rolled up holiday pay has been unlawful for a number of years. This is because it appears to discourage workers from taking their annual leave. However, from an employer’s perspective, this method is straightforward and involves a simple calculation to determine holiday pay entitlement for those with varying hours.

Under the new rules, an employer is now lawfully able to pay holiday on a “rolled up” basis provided the following circumstances apply:

1. The worker satisfies the statutory definition of an “irregular hours” or “part-year worker.”
2. Holiday pay is calculated at 12.07% of all pay for work done.
3. The additional pay is paid at the same time that the work is done.
4. Holiday pay is itemised separately on the worker’s payslip.

Calculating holiday pay for irregular hours/part year workers by using the rolled-up method is an option available to employers but it is not mandatory. If an employer does however elect to use this method, it is their duty to ensure that workers are still taking their annual leave entitlement.

Alternatively, holiday pay can be paid when holiday is taken, calculated at the rate of a week's pay for each week's holiday. A week's pay will be the average amount of weekly pay over the previous 52 weeks. Any weeks during which no work was performed or any weeks on sick leave or family leave are excluded from the calculation.

Section 3 – Practical tips

Employers should review existing holiday pay practices to ensure that they accurately reflect these changes. This may involve:

• Checking holiday year to see when the changes will impact on your business;
• Reviewing and revising employment contracts, worker agreements and holiday policies to reflect the correct position regarding carry over.
• For irregular hours workers/part year workers, reviewing contracts in relation to holiday entitlement and amending to the 12.07% accrual for holiday years from 1 April 2024.
• Deciding how to deal with pay for irregular hours / part year workers – rolled up or a 52 week average.
• Carrying out an audit of existing practices / calculations to ascertain whether there is a risk of holiday pay previously being miscalculated for example where additional payments such as commission or overtime may have been excluded incorrectly;
• Ensuring there is a system for encouraging workers to take leave throughout the year;
• Providing clear guidance to workers in relation to how their holiday pay will be calculated and paid.

About the authors

Partner Kate Benefer and Associate Adrian Henderson are part of the Employment team at RWK Goodman in Oxford. They presented on the issues outlined in this blog at Allen Associates’ HR Hub in February and took questions from almost 200 Oxfordshire-based HR professionals and employers who attended.

For advice and support with the amended Working Time Regulations, calculating holiday pay or any other employment issue, please contact them as follows:

Kate Benefer, Partner
Kate.benefer@rwkgoodman.com
01865 268639

Adrian Henderson, Associate
Adrian.henderson@rwkgoodman.com
01865 268371

To sign up to attend Allen Associates’ free monthly HR Hubs or to suggest a topic or speaker for a forthcoming event, please contact Kate Allen or visit our HR Hub for details.