I have touched on this subject in the past, (See https://www.morganjones.co.uk/2020/03/holiday-pay-rules/) but issues arising over the calculation of holiday leave and pay entitlements are part of an ongoing payroll nightmare. It’s not just this firm experiencing problems, anecdotally all accountants and many small firms and their bookkeepers are also having ongoing problems.
Working Time Regulations
The Working Time Regulations were introduced a few years back as an EU wide reform when UK plc was still a member of the club. However, now that we’re out, they’re increasingly being seen as not fit for purpose by many tax professionals. Personally, I don’t believe that they should be totally abolished, but I do accept that they’re overdue for reform and simplification
For a start, they mention little on how to do the calculations for zero-hour, part-time, variable hours or part-year workers. This is to say nothing of managing the calculation for starters, leavers, and the different rules for carrying leave over from one year to the next. Case law seems to be inconsistent at best and at worst makes the situation ever more confusing.
So today, I’m looking at the more important issues and I’ll try to make them easier to understand. For a start, did you know that annual leave is covered by 3 different areas of UK law:
This type of leave is derived from the UK’s previous membership of the European Union and is called Euroleave, because it is derived from the EU Working Time Directive. This type of leave stipulates 4 weeks leave (or 20 days for a full-time worker) and has been incorporated into UK domestic law. It ensures:
- Leave is four weeks on a ‘use it or lose it’ basis meaning if it is not used by the end of the holiday year then it is lost. However, currently, it can be carried forward if the reason for not taking it is Covid-related, something a currently ongoing consultation proposes to remove
- Pay is based on the value of ‘normal remuneration’, ie, the pay that a worker would normally expect to receive if they had been working.
It is this type of leave that has been the subject of case law interpretation over the years meaning employers have to include elements such as overtime and commission into the calculation.
2) Domestic leave
This type of leave derives from purely UK domestic legislation passed in 2007. It specifies a minimum of 1.6 weeks leave (or 8 days for a full-time worker and equates to our statutory bank holidays), with untaken leave being able to be carried over to the following leave year if there is an ‘agreement’ and pay is calculated as per the ‘week’s pay’ definition in employment legislation.
But it is important to remember that a week’s pay is not the same as normal remuneration.
3) Over and above leave
This is a leave entitlement in excess of the above statutory minimum of 5.6 weeks or 28 days, which includes all public holidays, such as Christmas day. Over and above leave is based on the contract of employment which may define different rules for carrying forward untaken leave and the rate of payment.
Other leave issues
There are two major issues that add to the confusion around UK leave types; firstly, employment and working time legislation is a devolved issue in the UK, for example, Northern Ireland has different legislation and rules compared to the rest of us.
Secondly, guidance frequently refers to a statutory entitlement, not differentiating between the three different types of leave outlined above. So, employers and software act one way for the different components and workers, by and large, just accept it. No organisation keeps records of which ‘type’ of leave a worker took and, therefore, what pay calculations should be performed.
Definitely time for reform I believe, but there are complications with certain types of workers, such as:
- Zero-hour workers If a worker works full-time from Monday to Friday and is never absent from the workplace save for holiday, the leave calculation is simple. This almost never happens in practice though; so, to accurately comply with the law, employers must calculate the weekly pay in the 52-week reference period. Also, the law states that the figure must be calculated weekly, and any calculation must only consider the weeks in which work was done, discounting weeks not worked.
In January 2023, the government started a consultation proposing amending this discount rule, ensuring the 52 weeks included weeks not worked. Plus, the reference period calculation would be fixed at the start of each leave year, based on the work done in the 52 weeks up until the end of the previous holiday leave year. So, the average pay calculation would be performed once annually rather than every time the worker went on leave.
- Part-year workers The Supreme Court has ruled that the 52-week reference period must be used and that a part-year worker is entitled to 5.6 weeks leave, although they only work part of the year.
- Part-time workers All workers must receive an entitlement of 5.6 weeks per holiday year and a worker who regularly works part-time should receive a prorated 5.6-week entitlement. So, if you work 3 days per week instead of 5 you’re entitled to: 28 days / 5 x 3 = 16.8, rounded up to 17 days.
Of course, the long-standing issue is whether a part-time worker should be paid for Bank Holidays, regardless of whether this is a day they usually work or not. Current legislation is silent on the matter, however, guidance from ACAS only says that a part-time worker should not be treated unfavourably when compared to a full-time worker.
- Rolled-up holiday pay This is where the employer pays holiday pay to the worker as they earn their wages. Frequently, they use the 12% calculation, being statutory holiday weeks divided by the annual working weeks. This has been ruled unlawful by the European Court of Justice, but as we’ve now left the EU, the current ongoing consultation proposes bringing this back for all workers.
- Carrying Forward Leave Currently, this is complicated for employers to administer and also for workers to understand, as each leave ‘type’ has different rules. The current consultation does not propose any major change to the rule that that 1.6 weeks can be carried forward into the next leave year by arrangement, except in some circumstances where it has not been possible to take the leave such as maternity and long-term sickness.
- Starters Current law prescribes the way the statutory 5.6 weeks is accrued for workers starting after the holiday year commences, but this is at odds with the way it accrues for the ‘over and above’ block. In practice, however, most employers do not treat the two types differently.
- Leavers For the 5.6-week statutory entitlement, the only time a worker can replace a leave entitlement with a payment in lieu, is if the employment ends.
I suspect any reader of today’s Blog, especially if you’re involved with payroll, will be utterly depressed by now, but chin up, the consultation exercise is drawing to a close and I’m reasonably confident that simplification of this complicated area of pay is on its way. Fingers crossed!