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UK government consults on reforms to holiday pay calculations

leave on paper note stuck to calendar editorial

The proposals around holiday pay were among the most notable employment law changes outlined in the UK government’s recent policy paper on regulatory reform.

Few would argue that creating a single pot of 5.6 weeks’ annual leave is preferable to the current arrangements under the Working Time Regulations, in which there are two pots: four weeks of EU-derived leave, and 1.6 weeks of UK-specific leave.

But the proposals have raised important questions about the rate at which the single pot of holidays will be paid. Will the new leave entitlement be paid at normal remuneration in the same way as EU-derived leave? Or will it revert to basic pay only, as is currently the case for UK-specific leave? These are among the questions which are now being examined in a new government consultation (31 pages / 287KB PDF) on retained EU employment law. The consultation, launched following the publication of the government’s policy paper on employment law reform, closes on 7 July.

The consultation paper states that merging the two existing leave entitlements into a single pot of statutory annual leave aims to reduce the costs that businesses face when trying to understand which legal framework applies. The government also believes the reform will help ensure that workers are receiving consistent amounts of holiday pay for their entire entitlement. Importantly, the government says that it is keen to explore how it could define and legislate to introduce a single rate of holiday pay for the entire 5.6 weeks of entitlement.

The consultation goes on to suggest that many businesses might already pay the entire 5.6 weeks of leave at a worker’s normal rate of pay because of the administrative burden of having to pay leave at differing rates. The government says that it recognises that other businesses could face significant additional costs if the entire 5.6 weeks of leave was required to be paid at a worker’s normal pay rate as a minimum. It also recognises the financial impact that requiring the 5.6 weeks of leave to be paid at a worker’s basic pay rate as a minimum would have on workers.

Faced with a choice of cutting holiday pay for workers or increasing costs for employers who do not currently pay the full 5.6 weeks at normal remuneration, the most likely outcome seems to be a new rate of pay defined around normal remuneration – in other words, the creation of a new pay rate by averaging a worker’s pay over a reference period. While the government might ordinarily be resistant to increasing costs for employers through regulation, the obvious advantage of simplifying the holiday pay system might be seen to soften that blow for employers.

A simpler holiday pay system should be aimed at reducing the litigation potential around holiday pay. Introducing a new rate of pay might also increase the legitimacy of arguments that retained EU case law on holiday pay should be departed from in any future case law around the new rate. The continued relevance of existing holiday pay case law will hinge on the precise drafting of the new holiday pay legislation and it would be helpful if any associated employer guidance issued by the government gave a clear steer on the matter.

This latest consultation also follows one launched in January on government plans to revamp holiday pay calculations for part-year workers, which closed in March. Employers should take this opportunity to input into the new consultation, both in relation to how they currently pay holiday pay and how they believe holiday pay should be paid in future.

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