Rolled-up Holiday Pay – and Part-year and Irregular Hours Workers.

Rolled-up holiday pay is paid as an uplift to pay for work undertaken at the same time that the worker is paid for the work, as opposed to being paid at the time holiday is taken.

Notwithstanding that rolled-up holiday pay is a commercially sensible and straightforward way of paying holiday pay in the case of workers whose pay fluctuates (avoiding, as it does, potentially complicated averaging calculations), it has been technically unlawful to pay statutory holiday pay on a rolled-up basis in any circumstances, because the letter of the law has dictated that holiday pay must be paid at the time that holiday is taken.

That said, as long as arrangements for rolled-up holiday pay are transparent – reflected both in contracts and pay slips – and do not short-change workers, the risk of liability for applying such arrangements is widely considered to be small, and outweighed by the administrative convenience that it achieves.

Under the Working Time Regulations, workers have a right to a minimum of 5.6 weeks' paid annual leave. This equates to 28 days for a full-time worker working five or more days a week. In this article, reference to ‘statutory holiday pay’ means the payments made to workers in relation to such holiday, as opposed to any contractual holiday pay entitlement beyond that.

The law relating to statutory holiday pay is very complex. This includes that different rules apply depending on such things as whether the worker has normal working hours. Another layer of complexity has now been added – the extent of the complexity being demonstrated, in part, by the length of this article.

Under new provisions, for holiday years starting on or after 1 April 2024, the rules relating to ‘part-year’ and ‘irregular hours’ workers will change very significantly – including to allow them to be paid rolled-up holiday pay.

Employers should not assume that rolled-up holiday pay is now to be technically lawful in all circumstances, or indeed that the statutory prescribed rate of rolled-up holiday pay (12.07%) will be appropriate in all circumstances (whether for part-year and irregular hours workers or otherwise). At the same time, employers should not be dissuaded from continuing or implementing rolled-up holiday pay arrangements outside the new legislative provisions – after obtaining, we would encourage, appropriate legal advice.

What employers need to do

Employers need to:

• Work out if they currently engage any part-year or irregular hours workers. See below for what these terms mean.
• Decide whether they wish to implement, or continue, rolled-up holiday pay for any classes of worker.
• Consider whether they need to amend terms and conditions of employment and/or holiday policies to reflect any changes in the legislation relating to part-year and irregular hours workers and/or, if applicable, to implement rolled-up holiday pay arrangements.
• If amendments to terms and conditions are required, consider whether any processes will need to be followed by law and/or as a matter of good employment relations.

Details of the legislative changes affecting part-year and irregular hours workers are as follows.

Part-year workers

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 is a period, or there are periods, within that year of at least a week which they are not required to work and for which they are not paid.

The DBT guidance states that the definition “includes part-year workers who may have fixed hours, for example, teaching assistants who only work during term time, and who are paid only when working".

Irregular hours workers

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".

There is no definition of "mostly variable", nor has the government given clear guidance as to what this means. It has been left, in the event of disputes, to be determined on the facts by employment tribunals.

The DBT Guidance gives the following examples:

Kevin, a hospitality worker who works a different number of hours each week.

Kevin would qualify as an irregular hours worker if his contract says that the hours he works will be wholly or mostly variable in each pay period. Kevin’s contract could be a ‘casual’ contract, otherwise known as a zero-hours contract.

Paul, who has a rotating 2-week shift pattern where he works 15 hours in week 1 and 20 hours in week 2. He does not work overtime.

Paul would not qualify as an irregular hours worker if his contracted hours are fixed during both week 1 and week 2. Given that Paul does not work overtime, 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 example of "Paul" suggests that workers performing shift work on a regular rotating shift pattern are not covered by the concept of an irregular hours worker (at least, if they do not work overtime). Although their working hours may vary from one week to the next, the fact that they are on a regular changing shift pattern means that their hours are not "wholly or mostly variable" under the contract.

However, a shift pattern where the hours are not fixed by the contract, and the worker may be offered a different pattern of shifts from one week to the next, may fall within the definition of irregular hours.

Neither the regulations nor the DBT Guidance are clear about the effect of overtime on whether a person qualifies as an irregular hours worker. The reference to “Paul” not working overtime suggests that he might be an irregular hours worker if he does so – but it might be a red herring.

The statutory test is whether the hours under the contract are mostly variable, which suggests that the focus should be on the contract, not on whether the hours vary in practice.

Arguably, a contract with regular basic hours, where the worker may be offered overtime in addition (voluntary overtime), would not be an irregular hours contract, because the contractual hours are fixed.

Where there is a contractual obligation to perform overtime when required (compulsory overtime) and the amount of overtime may fluctuate, then it might be said that the position is less clear – and whether this will make the worker an irregular hours worker or not will be important. A shift worker will be entitled to have overtime pay reflected in only four weeks’ holiday pay per year if they are not an irregular hours worker, but if they are one, regular overtime pay will need to be reflected in all of their statutory holiday pay

Accrual of holiday

For part-year and irregular hours workers, in any holiday year commencing after 1 April 2024, their holiday is calculated in hours rather than weeks, and accrues on the last day of each pay period at the rate of 12.07% of the actual hours worked in that pay period, rounded up or down to the nearest hour.

This is a very significant change. It will continue to be the case for all other types of worker that the amount of statutory holiday entitlement will not alter according to the amount of work that they do.

For example, if a worker who is not a part-year or irregular hours worker works regular overtime, whilst they will be entitled to have the overtime pay reflected in their holiday pay (for at least four weeks holiday a year – possibly more, depending on circumstances), the actual amount of time off that they will be entitled to take as statutory holiday will remain fixed at 5.6 weeks; whereas in the case of a part-year or irregular hours worker, the more time they work, the more time they are entitled to take as holiday, and vice versa.

Holiday also accrues for part-year and irregular hours workers during sick leave or “statutory leave” based on 12.07% of average working hours over a 52-week reference period.

In this context, "statutory leave" consists of maternity, paternity, or adoption leave, parental leave, shared parental leave, parental bereavement leave and, when it comes into force, neonatal leave. It does not include other time off under the employment legislation, such as for dependents, public duties, ante-natal appointments, adoption appointments, to fulfil the duties of an employee representative or pension scheme trustee, study and training, suspension on medical or maternity grounds, or carer's leave. Part-year and irregular hours workers do not accrue statutory holiday while taking any of those types of leave.

Neither does such a worker accrue further holiday while taking holiday, or any other type of paid or unpaid leave, such as a sabbatical.

They will, however, accrue contractual holiday entitlement at all times if that is expressly or impliedly agreed, and so if employers intend that such workers should not accrue contractual holiday entitlement at any time that they do not accrue statutory holiday entitlement, this should be expressly stated in contracts.

Method of accrual

The Explanatory Memorandum to the new legislation explains that:

This instrument introduces a method to calculate how much leave is accrued when irregular hours workers and part year workers take maternity leave or other family related leave (which will be defined as ‘statutory leave’). Employers will be able to look back over a 52-week reference period to calculate an average of hours worked across that period. Employers would need to include weeks not worked and not on statutory leave, so that the amount of accrued leave is proportionate to the time worked." (Paragraph 7.19)

The calculation is as follows:

Step 1. Calculate the average number of hours per week that the worker worked during the relevant period before the worker started the sick leave or statutory leave.

The "relevant period" means 52 weeks ending on the day before the start of sick leave or statutory leave, or such lesser period if the worker has been in employment for less than 52 weeks. This includes weeks in which the worker did no work. However, weeks in which the worker took any amount of sick leave or statutory leave (even if they also worked in that week) are ignored, and earlier weeks are brought into account, but no earlier than 104 complete weeks before the start of the sick leave or statutory leave.

Step 2. Calculate 12.07% of the number of hours arrived at under Step 1 to find the number of hours of annual leave that the worker accrues during each week of the sick leave or statutory leave.

Step 3. Multiply that number of hours by the number of weeks in a pay period for which the worker is taking sick leave or statutory leave to find the number of hours of annual leave that the worker accrues during each such pay period.

A difficulty created by steps 2 and 3 is that they focus on calculating the number of hours of annual leave accrued during a week of sick leave or statutory leave, and apply this to the "number of weeks" in which the worker is taking sick leave or statutory leave. They make no mention of fractions of a week. For example, the regulations do not make clear how to calculate the holiday accrued during one or two days of sick leave.

The most obvious solution is to treat those days as a fraction of a week and apply that fraction to the multiplier in step 3. However, this is difficult where the worker does not have regular working days, because it may not be clear what fraction of a week is represented by one day of sick leave.

Arguably, the calculation should be based on the average number of days worked per week by the worker over the "relevant period". So, if a worker has worked on average 3.5 days per week over the relevant period, then one day's sick leave would be 1 ÷ 3.5 or 0.29 of a week. However, this is not made clear in the legislation or the guidance, and may need further clarification in case law.

28-day limit

The legislation provides that "a worker cannot, in any leave year, accrue more than 28 days of annual leave under this regulation".

Since holiday for part-year and irregular hours workers accrues in hours rather than days or weeks, it is unclear what "28 days" means in this context. For a worker who has a standard length of working day, it would be straightforward, as 28 days will simply be 28 x the number of hours in the working day. However, the regulations do not set out a method of calculating the 28-day limit when the worker does not have a standard working day.

The DBT Guidance acknowledges this issue and states that, in the government's view, "it is appropriate to incorporate the cap as 28 days of the worker’s average working day". It goes on to provide an example. However, there is no clarity on the period over which the worker's hours should be averaged, nor on whether non-working weeks should be included in the averaging process.

In practice, though, a worker should not come up against this 28-day limit unless they are working, on average, more than 5 days a week throughout the entire year.

In any event, employers may choose not to apply the 28-day limit, and may simply allow relevant workers to accrue holiday based on their hours.

If the employer is paying rolled-up holiday pay, the 28-day limit applies to the amount of leave that the worker is entitled to take but not to the rolled-up holiday pay itself. Under the legislation, the rolled-up holiday pay must equal 12.07% of their pay for hours worked (plus any amount calculated as due for a period of sick leave or statutory leave), and there is no provision for limiting this to 28 days' pay.

Contractual holiday above the statutory minimum

In some cases, employers will give their employees more than the statutory minimum amount of holiday.

In such cases they may wish to give part-year and irregular hours workers a pro-rated amount of contractual holiday, so that their holiday accrues at greater than 12.07% of hours worked. Indeed, in certain circumstances they may be obliged to do so, so as to avoid breach of contract or unlawful discrimination.

The DBT Guidance gives an example, after Table 1, of a calculation based on six weeks' holiday.

Taking holiday

The new Regulation 15 of the Working Time Regulations covers the dates on which holiday may be taken by part-year and irregular hours workers, and sets out default notice provisions whereby workers can give notice to take holiday on particular dates and employers can give notice to the worker to take, or not to take, holiday on particular dates. These notice provisions can be varied by the contract of employment or another relevant agreement.

Regulation 15(1) provides a method for a worker to book holiday "to which he is entitled under regulation … 15B". A worker is not "entitled" to leave under regulation 15B unless they have accrued it. Accrual takes place on the last day of each pay period.

This means that, strictly speaking, a worker cannot book holiday in the first pay period of their employment (as they would not yet have accrued any holiday). It also potentially creates difficulties for using the holiday accrued during the last pay period of each holiday year, as the worker has no entitlement to take it until after the last day of the pay period, at which time the holiday year will end.

Holiday can only be taken in the leave year in which it has accrued, unless certain conditions are met (see the section ‘Carry-over’ below). There is no explicit right for holiday accrued in the final pay period of the year to be automatically carried over to the next leave year. However, regulation 15D(5) gives the worker a right to carry over holiday which the employer has failed to give them a "reasonable opportunity to take" or to "encourage" them to take.

As it was clearly Parliament's intention that workers should not lose their holiday without being given a reasonable opportunity to take it, employers have a choice. They can either allow workers to take holiday early, before it has technically accrued under the legislation, or allow carry-over of annual leave they have been unable to take. An employer that allows irregular hours workers to take annual leave before it has accrued runs the risk that they may not in fact work enough hours to accrue the holiday taken, and so it may be preferable for an employer to simply adopt a flexible approach to allowing carry-over for part-year and irregular hour workers.

Possible options might include, for example, allowing carry-over of up to a certain number of hours or days, or allowing unlimited carry-over but requiring it to be used within, say, the first three months of the next holiday year. In the case of term-time workers, the employer could simply adopt a policy that carry-over will be permitted to enable accrued holiday to be taken in the next school holiday period

How much holiday in hours?

The fact that accrual of holiday is measured in hours presents an issue as to the conversion of hours into days or weeks. If the worker requests a day's holiday or a week's holiday, how much of their accrued holiday (calculated in hours) does this use up?

Where the worker has a standard length working day, this should present little problem in practice. A day's holiday would consist of the number of hours in a standard working day, and the worker should receive that number of hours' pay. One possibility, where the length of the working day varies, would be to provide in the contract that a day's holiday will consist of [x] hours unless otherwise agreed. This may provide a practical solution to the question of how much holiday is being taken (and how much holiday pay should be provided) at a given time.

However, it may create problems for the purposes of the 28-day limit (see above) if the employer tries to define a day's holiday as consisting of less than the worker's average daily working hours, since this would potentially result in the worker getting less than their statutory entitlement, and would therefore amount to an unlawful contracting out.

Carry-over

A relevant agreement may provide for part of the statutory annual leave to which a part-year or irregular hours worker is entitled to be carried forward into the leave year immediately following the leave year in which it accrued.

"Relevant agreement" means a collective agreement, workforce agreement or any other agreement in writing which is binding on the worker. Often, in practice, there will be a term in the employment contract or a collective agreement, permitting workers to carry over up to [x] days' or hours of holiday. However, a relevant agreement could be any agreement in writing such as an exchange of emails, where there is an intention that it should be binding.

Contractual terms on carry-over are sometimes subject to conditions, for example, that the worker must obtain prior approval from their manager, or that the carried-over leave must be used within a certain time. There is no express limitation on how much of the holiday may be agreed to be carried forward, and so employers and workers will have considerable discretion as to the terms of any such agreement, provided at least some of the accrued holiday may be taken in the holiday year in which it accrues. However, in practice employers usually limit the amount of carry-over for reasons of effective workforce management.

Carry-over due to statutory leave or sick leave

Part-year and irregular hours workers have a right to carry over statutory holiday if either of the following apply:

• Where the worker is unable to take some or all of their leave as a result of taking a period of statutory leave. The carried over leave must be taken by the end of the following leave year.
• Where the worker is unable to take some or all of their leave as a result of taking a period of sick leave. The carried over leave must be taken within 18 months of the end of the leave year to which it relates.

Neither the legislation nor any of the earlier case law define what "unable" means in this context. However, it would arguably have to take account of the employer's business realities and the need for workforce planning or the need for the worker to complete necessary work and meet targets set by the employer before the end of the leave year.

Usually, a short period of sick leave or statutory leave (such as paternity leave) would not necessitate carry over, as the worker will be able to schedule (or re-schedule) their holiday at another time, subject to the needs of the business. However, with longer periods of absence, such as long-term sick leave or maternity leave, the chance of crossing into the next leave year, or the risk of there being insufficient time in which to realistically take holiday after the sick leave or maternity leave ends, will be much greater.

Carry-over due to employer's failure

Part-year and irregular hours workers have a right to carry over statutory holiday if, in any leave year, the employer fails to:

• Recognise a worker's statutory right to annual leave or payment in respect of it;
• Give the worker a reasonable opportunity to take their statutory annual leave or encourage them to do so; or
• Inform the worker that leave not taken by the end of the leave year will be lost.

In such cases the worker has the right to carry over any untaken leave, or leave which has been taken but was unpaid. The right to take the carried-over leave will last until the end of the first full leave year in which there has been no such failure by the employer.

It is not clear whether “fails to … give the worker a reasonable opportunity to take the leave … or encourage them to do so" means that there is the right of carry over if the employer has failed to do one or the other, or only if the employer has failed to do both.

In practical terms, a provision in a contract of employment or a well-publicised policy making it clear that employees must either use their holiday or lose it will help employers demonstrate that they provided sufficient information. Employers might protect themselves further by issuing periodic reminders to encourage workers, in good time, to take their holiday, and remind them that they will lose their entitlement if they do not take it.

Holiday pay

The employer of a part-year or irregular hours worker has a choice as to how to arrange to pay holiday pay:

• Pay at the time holiday is taken. Under this option, the worker will receive holiday pay reflecting the number of hours holiday taken in the relevant pay period. This is how holiday pay is paid for most workers in the UK.
• Rolled-up holiday pay. As indicated above, under this option the worker receives holiday pay reflecting the number of hours' holiday entitlement accrued during the pay period, regardless of the amount of holiday (if any) actually taken. No further payment is made for holiday at the time it is taken.

Payment when leave is taken

Holiday pay for part-year and irregular hours workers is calculated as an hourly rate of pay for the hours of holiday taken.

The statutory formula for the hourly rate is A ÷ B, where:

• A is a week's pay, based on the modified definition under regulation 16 of the Working Time Regulations.
• B is the average number of hours worked per week in the same weeks that are used to calculate a week's pay.

A week's pay

For part-year workers with normal working hours whose pay does not vary with the amount of work done or the times at which it is done, a week's pay will be the amount they earn for working their normal working hours (section 221-223 of the Employment Rights Act, read with regulation 16 of the Working Time Regulations). If the worker's remuneration includes any of the following additional elements, these must also be taken into account (to the extent that they are not already):

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

(It remains that in the case of workers with normal working hours whose pay does not vary with the amount of work done or the times at which it is done who are not part-year workers, the above additional elements need be reflected in holiday pay only for four weeks in any holiday year.)

One area of uncertainty under the new statutory provisions, and also under case law, is the extent to which an annual bonus (whether for individual or company performance, or a combination of factors) should be included in the holiday pay calculation.

For all other part-year workers and for irregular hours workers, a week's pay is calculated as an average of all remuneration earned in a 52-week reference period. Remuneration would include any holiday pay, overtime payments, commission, bonuses and other allowances or payments, except genuine expense claims. This 52-week period may not be exactly the same as the "relevant period" referred to above, as there is no automatic exclusion of weeks in which the worker took sick leave. However, weeks in which no remuneration was payable are ignored, as are any weeks in which an employee took maternity, paternity, adoption, parental, shared parental, or parental bereavement leave for any part of the week on less than full pay.

Rolled-up holiday pay

Instead of paying holiday pay at the time holiday is taken, an employer can pay part-year and irregular hours workers rolled-up statutory holiday pay as an uplift of 12.07% of the employee's remuneration for work done at the same time as the remuneration for work done.

If a part-year or irregular hours worker currently has a contractual paid holiday entitlement in excess of 5.6 weeks, the employer will need to increase the percentage used for rolled-up holiday pay to reflect that greater holiday entitlement. If, however, the employer doesn’t currently reflect certain elements of pay in the pay for any holiday taken beyond the statutory minimum entitlement and it wishes to maintain that stance, subject to the next paragraph, it might be appropriate to apply a different percentage uplift to some elements of pay than others.

If there are comparable full-time staff with contractual holiday in excess of the 5.6 weeks' statutory minimum, the employer may need to ensure that arrangements for holiday and holiday pay for part-year / irregular hours workers are not less favourable to them in order to avoid unlawful discrimination.

Rolled-up holiday pay during sick leave and statutory leave

Rolled-up holiday pay is not payable in respect of non-working time, unless the employee is taking sick leave or statutory leave, as defined above.

In such cases the worker must be paid an amount of rolled-up holiday pay in respect of the holiday accrued during sick leave or statutory leave, "equal to the average amount of holiday pay that the worker was paid for each pay period during the relevant period".

The "relevant period" for these purposes is 52 weeks ending with the day before sick leave or statutory leave starts, or if the employee has been receiving rolled-up holiday pay for less than 52 weeks, such lesser period. Unlike the relevant period for calculating a week's pay, there are no weeks excluded from this relevant period, and so it may include weeks of sick leave, statutory leave and other non-working weeks.

Practicalities of rolled-up holiday pay

The amount of rolled-up holiday pay paid in any pay period must be set out on the worker's itemised pay statement.

For advice on any aspect of the law relating to holiday pay, please contact me or another member of our Employment Team.