Significant changes to holiday pay calculations and rules are coming into effect on April 1st, 2024 that will have a major impact on umbrella company workers across the UK. These new regulations stem from the landmark Brazel v Harpur Trust case and the government’s subsequent consultation on addressing the anomalies highlighted by the ruling.
The key driver behind the changes is to simplify and standardise how holiday pay entitlement is calculated for workers, especially those with variable or irregular hours and pay. The existing system based on a set 5.6 weeks of annual leave has created numerous issues for employers when determining holiday pay for atypical workers.
Under the new rules, holiday pay calculations will move to an hourly accrual system with a cap of 28 days per year rather than being based on a weekly entitlement. This should eliminate many of the problems caused by the current calendar-based approach.
Two New Worker Categories
Central to the reforms are two new categories of workers that the calculations will be based upon – “irregular hours workers” and “part-year workers.” The vast majority of umbrella employees are expected to fall into one or both of these groups.
An irregular hours worker is defined as someone whose paid hours vary wholly or mostly from pay period to pay period under their contract terms. A part-year worker is required under their contract to only work part of the year, with periods of at least one week off unpaid.
For these two worker types, holiday pay will now accrue as a set percentage of 12.07% of the total hours worked in a pay period when no sick or statutory leave is taken. During periods of sick leave or statutory absence like maternity leave, holiday pay continues to accrue but is calculated as 12.07% of an average of the hours worked in the preceding 52 weeks.
Crucially, the new rules also standardise how holiday pay rates are calculated. The rate will be based on an individual’s average hourly earnings over the 52 weeks before the calculation date, excluding any unpaid weeks or sick/statutory leave periods.
Rolled-Up Holiday Pay Now Permitted
One of the biggest changes is that the practice of rolling-up holiday pay into an individual’s hourly or daily rate will now be permitted for umbrella companies and agencies. This controversial method has previously been unlawful as it denied workers their entitlement to paid annual leave.
Under the new regulations, rolling-up holiday pay becomes an option for providers to apply on a case-by-case basis, rather than the current norm of accruing it over time. This could potentially simplify payments and administration.
However, a rolled-up holiday pay approach will require the provider to track each payment made that includes the rolled-up element, ensure statutory entitlements are covered, and make additional payments for any accrued holiday during periods of sick or statutory leave.
Most experts expect the majority of umbrellas to continue with the current system of accruing and paying out holiday pay when taken, or potentially adopting an ‘advanced’ model of paying out estimated accruals each pay period rather than holding funds.
Aligning Holiday Years
Another key recommendation for providers ahead of April 2024 is to align any contracted holiday leave years with the tax year of April to March, rather than the more commonly used calendar year.
This will streamline the transition to the new hourly accrual system on April 1st while also avoiding potential disparities with holiday entitlement calculations straddling the changeover date under the old and new rules.
Assessing AWR Implications
Although providing welcome clarity in many areas, the holiday pay reforms do create some additional issues for umbrellas to consider around the Agency Worker Regulations (AWR). Providers will need to review any comparable employees’ entitlements under AWR, which may exceed the new 28-day statutory minimum.
In cases where a worker’s comparator receives a greater annual leave allowance, the umbrella may need to calculate holiday pay using a higher percentage than 12.07% to ensure it matches the comparable entitlement after 12 weeks as required by AWR.
Contract and Process Updates Needed
With the fundamental changes to holiday pay calculations and policies, all umbrella providers will be required to update their employment contracts, handbooks, and processing systems before April 2024.
Some of the key areas requiring revision will be contractual clauses and calculations related to holiday accrual rates, accrual during sick/statutory leave, payment rates based on historic earnings, and any provisions for rolled-up holiday pay if adopted.
Overall, while increasing complexity in some areas, the reforms should provide welcome simplification to the notoriously complex matter of calculating holiday pay for the temporary workforce. Properly prepared, the changes can help umbrellas reduce liabilities and provide much-needed standardisation that will benefit those affected.
