After completing consultation into proposed holiday, working time and TUPE reforms that it announced earlier this year, the government has now issued its response to that consultation along with draft legislation setting out the changes it intends to make. The first of those changes is due to come into effect from 1 January 2024, with various others due to take effect in the first six or so months of 2024, so employers do not have long to take stock and review their own practices.
In this article, we take a closer look at the changes and what they mean for employers.
Background
The government’s review of working time and TUPE forms part of its post-Brexit plans to review laws derived from EU law. The original plan, first announced by Liz Truss’ government in autumn 2022, was for all EU-retained legislation to be revoked automatically at the end of 2023. After changing tack in May this year and deciding to rein back on this so-called sunsetting provision, the government instead decided to limit the revocation to a specific list of EU legislation that it would revoke at the end of 2023. That list (and subsequent amendments to that list) did not include any material employment legislation.
However, that is not the full story for two main reasons:
- At the time that it announced the U-turn on the sunsetting provisions in May 2023, the government set-out its intention to review various areas of employment law in a bid to remove red tape for businesses. In particular, it set its sights on the Working Time Regulations 1998 (WTR) and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and launched a consultation on a range of proposed amendments to these pieces of legislation. It is that consultation, plus an earlier consultation relating to holiday entitlement in the case of irregular hours and part-year workers, that the government responded to last week.
- Although the majority of EU-derived legislation remains binding after the end of 2023, the remaining provisions of the Retained EU Law (Revocation and Reform) Act (the Revocation Act) remove the effects of other important aspects of EU law and potentially create more flexibility for the government and for courts to diverge away from EU law.
The changes announced last week and detailed below are a mixed bag – some rely on the government’s new powers to move away from EU law, including enabling rolled-up holiday pay for some categories of worker and disapplying the effects of an EU decision which seemed to broaden a business’ obligation to keep records under the WTR. In contrast, some of the announced changes are looking to replicate or codify existing aspects of EU case law, to ensure that those protections are not lost once the Revocation Act takes full effect from 1 January 2024. In relation to the latter (particularly the rules on carry-over of holiday and holiday pay), the government says that it is restating those principles so that the law will have the same effect in practice as currently. On those points, the broad intention seems to be to maintain the status quo, but it remains to be seen whether the wording in the draft legislation will achieve this.
Against that backdrop, we look at the changes announced last week.
Working time reforms
Irregular hours and part-year workers – Arguably the biggest changes are those relating to holiday entitlement and holiday pay for irregular hours and part-year workers. In addition to its May 2023 consultation on WTR and TUPE changes, the government had separately carried out a consultation into the calculation of holiday entitlement for irregular hours and part-year workers at the end of 2022. That consultation was in response to a Supreme Court decision, Harpur Trust v Brazel, which found that part-year workers are entitled to a full 5.6 weeks’ annual leave entitlement. This left part-year workers, and potentially some other irregular hours workers, with a disproportionately high amount of annual leave entitlement. This seemingly unintended unfairness and the inherent difficulties in calculating leave entitlement for workers with atypical working patterns is what has led the government to introduce two new statutory mechanisms for those categories of workers:
a) 12.07% accrual of annual leave – Rejecting its original proposal to introduce a 52 week-averaging mechanism to calculate holiday entitlement for irregular hours & part-year workers, the government has instead put forward a mechanism for their annual leave to be accrued in each pay period at the rate of 12.07% of the hours worked by the worker in that pay period. By way of example, if a monthly paid casual worker has worked 100 hours in the month of November, they will accrue 12.07 hours’ (rounded down to 12 hours) annual leave on the final day of that month. The new mechanism imposes a cap so that no worker can accrue more than 28 days’ annual leave per leave year, which is the equivalent to 5.6 weeks’ annual leave for a typical full time fixed hours worker. Although employers will need to review their processes and make changes to align with this mechanism, it is likely to be welcomed by many employers as it provides a relatively clear and simple calculation to work out a relevant worker’s leave at any time. However, things are more complicated (with the use of a 52-week look back averaging mechanism) for irregular hours and part-year workers who are on or have been on sick leave or family-related leave, so organisations will need to check that their payroll systems have this covered too.
b) Rolled-up holiday pay – Separately to the accrual mechanism, the draft legislation also introduces for the first time a statutory option for employers to opt to pay irregular hours and part-year workers’ holiday pay by way of a 12.07% uplift to the workers’ remuneration. More commonly known as ‘rolled-up holiday pay’, this option allows employers to pay an uplift of 12.07% in each pay slip alongside the worker’s remuneration for that pay period. The holiday pay uplift must be separately itemised in the pay slip. Although technically unlawful since a 2006 ruling, rolled-up holiday pay has continued to be used in a number of sectors as it is the simplest approach for irregular hours workers. This statutory amendment will give relevant employers the green light to continue to pay rolled-up holiday pay (or to implement it for the first time) for eligible workers, but it will be important to check that their rolled-up holiday pay processes and calculations are compliant with the statutory mechanism.
The draft legislation includes the following definitions of who will count as an irregular hours worker or a part-year worker:
‘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’
‘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 are periods within that year (during the term of the contract) of at least a week which they are not required to work and for which they are not paid’.
The new regime for irregular hours and part-year workers will, if passed, take effect for holiday years starting on or after 1 April 2024, so some employers will not have long to review their current arrangements and make any required changes to their contracts, policies and processes (including payroll and time & attendance processes).
Holiday pay – One of the main reforms proposed in the May consultation was the merger of the two ‘pots’ of annual leave currently set out in Regulations 13 and 13A of the WTR, e. 4 weeks under Regulation 13 (often referred to as European or Euro leave) and 1.6 weeks’ under Regulation 13A (often referred to as UK leave). Under the original proposal a worker would be entitled to one single leave entitlement of 5.6 weeks per year. The government has decided not to make that change at this time and so we will, at least for now, continue with a two-tier system with different rules applying to the different types of leave.
Holiday pay rules are one of the main ways in which the two pots of leave are treated differently. Whilst Regulation 13A UK leave is usually paid at basic pay rate only, a series of landmark EU and UK cases have interpreted the WTR to require Regulation 13 European leave to be paid at the rate of a worker’s ‘normal remuneration’. The government has sought to formalise this latter point in the draft legislation published last week, as it has introduced a statutory requirement that the following payments should be included in the calculation of a week’s pay for the purposes of Regulation 13 leave:
a) “payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract”
b) “payments for professional or personal status relating to length of service, seniority or professional qualifications”
c) “other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date”.
Carry-over rules – The original WTR has very restrictive rules on when annual leave entitlement can be carried over, but over the years EU and UK caselaw has interpreted the WTR in a way to enable carry-over in certain situations. The draft legislation includes provisions seeking to put this on a statutory footing, and bring some clarity to when leave can be carried over. It allows carry-over:
- where a worker is unable to take some or all of their annual leave entitlement due to maternity or other family-related leave. This will apply to the full 5.6 weeks’ statutory leave entitlement contained in the WTR, and the carried over leave will need to be taken in the following leave year;
- where a worker is unable to take annual leave as a result of taking a period of sick leave. This is limited to the four weeks’ annual leave entitlement set out in Regulation 13 of the WTR (the first pot of leave mentioned above), and the carried over leave must be taken in the 18 months following the end of the relevant leave year; and
- where an employer fails to:
a) recognise a worker’s right to annual leave or to payment for that leave; or
b) give the worker a reasonable opportunity to take that leave or encourage them to do so; or
c) inform the worker that any leave not taken by the end of the leave year, which cannot be carried forward, will be lost.
This is limited to the four weeks’ annual leave entitlement set out in Regulation 13 and a limit is placed on how long such carried forward leave can be carried forward after the employer addresses the relevant failure identified in a-c above.
Record-keeping under the WTR – Away from the topic of holiday, the final working time-related change relates to record keeping. In 2019 a European court held that employers should have an objective, reliable and accessible system to record the daily working time of each worker. This conflicted with the much narrower record-keeping obligations under the WTR, which only require an employer to keep adequate records to evidence compliance with certain aspects of the WTR (including the maximum working week and limits on night work). To address this inconsistency, the draft legislation amends the WTR to clarify that businesses do not have to keep a record of workers’ daily working hours.
TUPE reform
The final change is a relatively modest extension of an existing exception contained in TUPE. Ordinarily, information and consultation under TUPE should take place with appropriate representatives of the employees affected by the transfer. There is currently an exception which allows (but does not require) micro-businesses with fewer than 10 employees to opt instead to inform and consult directly with the affected employees. The draft legislation published last week extends this flexibility to:
1. businesses with fewer than 50 employees (effectively widening the micro-business exception to slightly bigger businesses); and
2. small transfers, where the number of employees transferring is fewer than 10.
If passed, these exceptions will apply to transfers taking place on or after 1 July 2024. Like the existing micro-business exception, the extended exceptions will not apply where existing representatives are already in place.
Although greater flexibility for small employers and for small transfers is positive news, in practice this change is unlikely to have a significant impact as many employers have already taken this approach for small transfers where affected employees have consented to direct information and consultation.
Next steps for employers
Which of the above changes is going to have the biggest impact for your business is going to depend on the nature of the organisation and the types of worker that you employ. Most (potentially all) employers will be affected in some way, although those who engage large numbers of irregular hours or part-year workers will be more significantly affected. It is important to take stock in the coming months and determine what, if any, changes your business needs to make.
Key areas for you to review within your organisation could include:
- whether you engage any irregular hours and part-year workers;
- if you do, what holiday accrual and holiday pay arrangements you currently have in place for those workers and what their contracts say about holiday entitlement;
- what changes you may need to make to contracts and policies, and the payroll and time & attendance processes, for those workers; and
- whether your policies or contractual wording make it clear that workers will lose any untaken holiday entitlement at the end of the leave year, except in the limited circumstances in which carry-over is permitted. The third category of carry-over included in the draft legislation emphasises the importance of employers ensuring that they have appropriate systems in place that enable workers to take their leave and ensure they are informed about the consequences of not taking that leave.
If you would like to discuss any of the potential implications for your organisation, please feel free to get in touch with Luke Bowery, Adrian Martin or your usual employment team contact.
Disclaimer
This briefing gives general information only and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, you should not rely on it as legal advice. We do not accept any liability to anyone who does rely on its content.