What you need to know about holiday pay changes
The government recently announced the biggest shake-up in holiday pay since 2020. Here we untangle the changes and explain clearly what this means.
- The new regulations will not take effect until an employer’s holiday leave year starts after April 2024. This means the earliest they could apply would be April 2024 for those who have a holiday year starting in April. For others who have a holiday year starting in January, the new law would not apply until January 2025. Until then the current legislation continues to apply.
- These changes only apply to irregular-hours workers, all other workers are unaffected.
- Statutory paid holiday entitlement is limited to 28 days, even if the worker works more than 5 days per week.
An employer will be able to choose between 2 new options: rolled-up holiday pay or accrual of hours.
Rolled-up holiday pay (RHP) for Irregular and part-year workers option
Employers can choose to roll up all holiday pay on every payslip by adding 12.07% to the total paid in the pay period. The government expects employers to clearly mark RHP pay separately on each payslip, as in the example below:
The employee is expected to take any holiday.
Although, this is the simplest approach, in the consultation half of the respondents did not want to use rolled-up holiday pay. The disadvantages of RHP include:
- It discourages an employee from taking holidays because, during any period of holiday, they receive zero pay.
- The employer’s wage bill will increase up-front by not just 12.07%, but it will also attract additional employees’ national insurance NIC and employers’ auto-enrolment pension contributions.
- RHP does not allow different rates for basic vs. overtime hours and it must be paid on total earnings.
- Employers are required to ensure that workers take at least 5.6 weeks of holiday per year, effectively based on no records
At the current time, many employers may not wish to use RHP.
Accrual of 12.07% of hours worked in each pay period option
This option requires the employer to accrue 12.07% of hours worked in any pay period. So, for example, if the worker worked 68 hours in a month, the employer would accrue 8.2076 hours of holiday, which is rounded down to 8 hours. During each pay period, additional holiday hours will accrue, and the employer will need to keep a running total. Having accrued holiday hours at 12.07% of hours worked, you need to work out an average rate. You calculate that rate using a rolling 52-week reference period which includes paid weeks and hours but excludes unpaid weeks (no pay or hours) going back up to 104 weeks. Total pay is divided by total hours in the reference period to get the rate.
If an irregular-hours or part-year worker takes sick leave or parental leave, the employer will be required to calculate a 52-week average weekly accrual. This average will exclude zero paid weeks. The employer will not need to go back further than 104 weeks. If 52 weeks are unavailable, then the employee can use the lesser number. The 52-week average will be hours per week and the employer will need to accrue 12.07% of this number of hours for any statutory leave weeks.
At some point, the employee would request a holiday, and if approved could use some, or all, of the accrued hours. So for example, if 15 hours have been accrued over 3 months, the employee might request 6.5 hours of holiday. One challenge is how to book hours and days as the employer is also required to ensure that 28 days of statutory holiday is provided over the course of a holiday year. A 52-week average rate is then used in order to ensure that the employer pays for these hours at an average rate of pay over the reference period.
Here is an example payslip which shows the date of the holiday, and the hours taken using the average pay rate:
The employer must accrue hours – this is not accrual of pay. Pay will only be calculated when holiday hours are taken. NB. It is important to note that accrued holiday cannot be simply converted to pay, it must be paid when holiday hours are taken. The only exception is payment in lieu where the worker’s employment is terminated
The advantage of this approach is it does incentivise employees to take holidays. Indeed, if they take a holiday i.e. losing normal pay, they would receive equivalent holiday pay. Also, no up-front payment is required.
The disadvantage is the complexity and steps required:
- Careful accrual of holiday hours at 12.07% for each pay run
- Accrual of hours during statutory leave periods using a 52-week average
- Visibility of accrued hours by the employee
- A process whereby an employee can request holiday hours
- A process where the request can be approved
- A process where the average rate can be calculated and the accrued hours would then be reduced by the amount taken
- Carryover of hours to a new holiday year where the worker cannot take the hours
This approach does effectively pay at 12.07%. However, it requires either many manual steps to complete or automated software that can perform the above steps.
Summary
Until the new rules take effect, the current holiday regulations apply.
When a holiday year falls within the new law, employers will have the option of either RHP or the new 12.07% accrual. These only apply to irregular-hours workers or part-year workers. and they do not apply to any other workers. Many employers do not want the use rolled-up holiday pay RHP due to its disadvantages and higher upfront cost. Instead, 83% of employers prefer to use the option of 12.07% accrual of hours which is itself complicated.
Therefore, the best solution is to use payroll software which can completely automate the ongoing 12.07% accrual of hours, 52-week average accrual of statutory leave, employee booking, manager approval, average rate calculation and the payout of holiday pay according to the new regulations with zero effort and time. With automated holiday pay software like paiyroll®, the new regulations can be implemented with no upfront increased employer expenditure, and no disadvantages but with the benefits intended by the new legislation.