The government has published the draft Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 (the “draft Regulations”), which are likely to come into force as soon as 01 January 2024.The draft Regulations contain some important changes to existing legislation, in particular in relation to the calculation of holiday pay. Employers will need to consider the implications for their business and make any necessary adjustments in a relatively short period of time, ahead of the anticipated effective date.Below, we consider the key changes proposed by the draft legislation in relation to holidays and working time, and the steps that employers should be taking in advance of the draft legislation taking effect.

How did we get here and how will it work?

Following the end of the Brexit implementation period on 31 December 2020, the EU (Withdrawal) Act 2018 (the “2018 Act”) largely froze the legal position in the UK immediately prior to 01 January 2023. The 2018 Act provided that “retained EU law” (“REUL”) and any related pre-2021 EU and UK case law would be retained (i.e. would still apply) after the Brexit implementation period as UK law.

By the time it received Royal Assent on 29 June this year, the Retained EU Law (Revocation and Reform) Act 2023 (the “2023 Act”) had been pared back from a full revocation of all REUL. It imposed the following key changes which will take effect as of 01 January 2024:

  • c.600 pieces of EU-derived legislation will cease to have effect;
  • directly effective rights, powers and duties preserved by the 2018 Act will be repealed;
  • REUL will be renamed 'assimilated law' (all references to REUL to be read accordingly); and
  • general principles of EU law will be removed from domestic law.

In parallel with the 2023 Act’s passage through Parliament, the UK government ran several consultation processes focused on key aspects of EU-derived UK employment law which formed the basis for the draft Regulations, namely:

  • Calculating holiday entitlement for part-year and irregular hours workers, published on 12 January 2023, which looked at holiday entitlement for part-year and irregular-hours workers; and
  • Retained EU Employment Law, published on 10 May 2023, which focused on reforms to the Working Time Regulations, holiday pay and TUPE.

What do the draft Regulations do?

a. The draft Regulations make key changes to the following areas of UK employment law:

i. record keeping requirements under the Working Time Regulations 1998 (“WTR”); ii. annual leave and holiday pay calculations under the WTR; and iii. consultation requirements under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) (these are outside the scope of this article - please see the TUPE amendments here)

b. The draft Regulations amend the WTR to codify certain principles that have been developed in the case law of the European Court of Justice (“ECJ”) and domestic case law under the Working Time Directive (2003/88/EC) (“WTD”). These include:

i. the right to carry over annual leave in various scenarios; and ii. the rate of pay for annual leave accrued under Reg 13 WTR.

c. Finally, the draft Regulations revoke two pieces of current legislation:

i. the European Cooperative Society (Involvement of Employees) Regulations 2006 (not relevant to the vast majority of employers); and ii. the Working Time (Coronavirus) (Amendment) Regulations 2020.

The changes described above only apply in England, Scotland and Wales and do not apply in Northern Ireland (other than the revocation of the European Cooperative Society (Involvement of Employees) Regulations 2006).

What do the key changes mean for employers?

1. Holiday pay: clarifying the definition of ‘a week’s pay’

The draft Regulations restate and codify retained EU and domestic case law on what should be included in "normal remuneration" when calculating holiday pay. Under the draft Regulations, a week's pay for holiday under Reg 13 WTR will include payments:

  • which are intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out (which would include commission payments);
  • for professional or personal status relating to length of service, seniority or professional qualifications; and
  • which have been regularly paid to a worker in the 52 weeks preceding the calculation date (such as overtime payments).

Employers must note that the legislation maintains a distinction between the 4 weeks of Reg 13 WTR holiday (which is derived from the WTD) and the 1.6 weeks of Reg 13A WTR holiday (which is a wholly domestic entitlement). Accordingly, the amended definition of a week’s pay will not apply to the 1.6 weeks' Reg 13A WTR holiday, to which the current definition of a week's pay, set out in the Employment Rights Act 1996, will continue to apply.

2. Holiday pay: permitting rolled-up holiday pay

The draft Regulations set out a new system of holiday accrual for irregular hours and part-year workers (following the difficulties caused by the Supreme Court's decision in Harpur Trust v Brazel [2022] UKSC 21) and permit rolled-up holiday pay (the traditional 12.07% calculation) for those who work irregular hours.

New definitions: The draft Regulations define "irregular-hours worker" and "part-year worker" as including workers whose hours are wholly or mostly variable (e.g. casual workers and some agency workers), and workers who contractually have periods of at least one week per year where they do not work and are not paid (e.g. hourly-paid term-time or seasonal workers).

Calculation and accrual: For leave years starting on or after 1 April 2024, holiday entitlements for irregular-hours and part-year workers will be set out in a new Reg 15B WTR (and won’t be governed by Regs 13 and 13A WTR). Under this provision:

  • holiday will be calculated in hours rather than weeks, and
  • holiday will accrue on the last day of each pay period, at the rate of 12.07% of the actual hours worked in that pay period; and
  • an average over a 52-week reference period will be used to calculate the holiday accrued during a period of sick leave or statutory leave (such as maternity leave).

Single, unified right: Reg 15B WTR does not draw a distinction between WTD-derived holiday (Reg 13 WTR) and domestic holiday (Reg 13A WTR) for irregular-hours and part-year workers.

Employer’s option to choose: Employers will be able to choose from two systems for paying holiday pay for Reg 15B WTR holiday:

  1. System 1: The employer can pay holiday pay when holiday is taken, calculated at the rate of a week's pay for each week's holiday (applying the new definition referred to above and a 52-week reference period). A week's holiday will consist of the average number of hours worked in each week of the same period. This should, in effect, produce an hourly rate of holiday pay that reflects the average hourly rate of pay over the last year.
  2. System 2: The employer can pay rolled-up holiday pay under new Reg 16A WTR as a 12.07% uplift to the worker's remuneration for work done in each pay period. This is therefore a slightly different, and simpler, calculation than if holiday pay were being paid at the time holiday is taken. Workers must be allowed to take their holiday but will not be paid at the time they take it.

3. Working time: clarifying holiday carry over rights and obligations

Under amended Regs 13 and 13A WTR, and new Reg 15D WTR, all workers will have a right to carry over holiday from one leave year to the next if any of the following apply:

  • the worker is unable to take some or all of their leave because they have taken:
    • statutory leave (including maternity leave, paternity leave, adoption leave, parental leave and shared parental leave);
    • sick leave (in which case the carried over leave must be taken within 18 months of the leave year to which it relates); or
  • where in any leave year, the employer fails to:
    • recognise a worker's right to (paid) annual leave;
    • give the worker a reasonable opportunity or encourage them to take leave;
    • inform the worker that leave not taken by the end of the leave year will be lost.
    This means that workers who have been misclassified as self-employed and not provided by their employer with paid annual leave will have rights to carry forward their statutory leave entitlement, in line with the ECJ’s decision in King v The Sash Window Company Limited (C-214/16). The right to take the carried-over leave will continue until the end of the first full leave year in which there is no such failure by the employer.

These carry-over rights for irregular-hours and part-year workers apply to all of their Reg 15B WTR holiday. Under the draft Regulations, the worker and employer can agree to carry over "part" of the worker's Reg 15B WTR holiday to the next leave year.

For everyone else, the carry-over rights will apply to Reg 13 WTR holiday (EU-derived) but not Reg 13A WTR holiday (UK-only entitlement), with one exception: the right to carry over where family-related leave has been taken will apply to both Reg 13 and 13A WTR holiday, in line with the ECJ’s decision in Merino Gomez v Continental Industrias del Caucho SA (C342/01).

4. Working time: removal of COVID-19 carry-over rules

On 26 March 2020, the government introduced regulations relaxing the restriction on carrying over annual leave as part of its emergency response to COVID-19. These rules will be repealed on 1 January 2024 and any accrued holiday carried over under those rules must be used up by 31 March 2024 or it will be lost.

5. Working time: clarifying record keeping requirements

The draft Regulations clarify an employer’s obligation to maintain records in respect of working time.

The ECJ's judgment in Federación de Servicios de Comisiones Obreras (CCOO) v Deutsche Bank SAE (Case C-55/18) created significant uncertainty regarding working time record-keeping obligations. The ECJ held that member states must require employers to set up a system to record actual daily working time for each worker to comply with the working time and rest limits set out in the WTD. Aside from creating a greater administrative burden, the decision implied that the record-keeping obligation under Reg 9 WTR (which only requires employers to keep "adequate" records to show compliance with the 48-hour week and the night work rules) may not comply with the WTD.

The draft Regulations amend the WTR to explicitly state that employers are not required to keep a record of the daily working hours of all workers if they are able to demonstrate compliance without doing so. The new legislation states that the records "may be created, maintained and kept in such manner and format as the employer reasonably thinks fit", and that "an employer need not record each worker's daily working hours in order to comply with [the duty under Reg 9 WTR] if the employer is able to demonstrate compliance without doing so." There is no explicit obligation to keep any records to show compliance with daily or weekly rest periods or rest breaks in the UK.

What should employers do?

  • Review and adjust holiday calculations to comply with the new legislation before 1 January 2024. For employers who do not currently include ancillary payments in holiday pay calculations, this may require significant changes to their systems and is likely to mean that holiday pay becomes an increased cost for their business.
  • Employers of irregular-hour and part-year workers must consider the implications carefully, with particular care around implementing updated systems for calculating accrual and decide on their preferred approach to rolled-up holiday pay.
  • Update policies and adjust settings to reflect the changes to holiday carry over (noting the different treatment of Reg 13, 13A and 15B WTR holiday).
  • Remove any COVID-related fixes for holiday carry-over.
  • Review working time recording keeping systems and records to ensure these comply with the new legislation.
  • Carefully plan communications with employees about any changes to pre-empt and manage their response.

Comment

The good…

Employers should be relieved that the proposed method for calculating irregular-hours and part-year worker holiday accrual under the final draft Regulations is simpler than originally proposed, and it more accurately reflects what many employers were doing in practice pre-Brazel. The new legislation acknowledges that a better accrual system is needed for the gig economy and an increasingly casual workforce. In effect, the government has simply formalised what was already happening in practice before Brazel and added some additional key protections such as holiday accrual during sickness or family-related leave. For those who also employ employees with more regular hours, these changes will address the perception that seasonal / casual workers receive more holiday than others, based on the amount of work done.

Similarly, the draft Regulations align these changes to accrual systems with the rolled-up holiday pay proposals. These changes were derived from different consultation papers, so this alignment is a pleasant surprise and one that should benefit employers and employees alike.

Further, that the government has taken the opportunity to codify and clarify principles which were established under EU case law is a welcome step towards giving employers and employees greater certainty – this should make it easier for both groups to understand and apply the law in this area.

The bad…

Despite all these changes, uncertainties and complexity still remain, particularly as regards the calculation of holiday pay.

The definition of ‘a week’s pay’ in the Regulations doesn’t go any further than the existing case law, meaning that disputes as to whether a particular type of payment should be included or not will continue. In particular, the issue of annual bonuses (as raised in Lock v British Gas Trading Ltd [2016] EWCA Civ 983) is not addressed.

Another likely frustration for lawyers and employers alike is that the legislation maintains the confusing distinction between Reg 13 (EU-derived) and Reg 13A WTR (domestic) holiday. The UK government could have created a single unified right to 5.6 weeks’ paid holiday with consistent rules on pay, carry over etc., which would have simplified this increasingly complex area. There are obvious reasons why the government decided not to do this (it would have either had to reduce Reg 13 holiday pay below EU levels or level up pay for Reg13A holiday, both of which have financial and political implications) but many will feel that this was an opportunity missed. This approach is also out of line with the Supreme Court’s decision in Chief Constable of Northern Ireland v Agnew [2023] UKSC 33, which held that holiday entitlement is a "composite pot" rather than two distinct types, leaving the door open for ongoing debate and litigation.

Final thoughts

Whilst the majority of the changes are welcome, the remaining uncertainties are not. Employers do not have long to get their houses in order, so need to react quickly. Given the level of trade union and employee activism around holiday pay in particular, these changes may trigger additional scrutiny and a further wave of litigation or representation activity, in particular for employers that continue to calculate holiday pay on the basis of basic pay only, despite the case law to the contrary - employers should be alert to this and react promptly.