Significant changes to holiday pay calculations and rules came into effect on April 1st 2024, majorly impacting 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 previous system created numerous issues for employers when trying to determine the correct level of holiday pay for atypical workers.
Under the new rules, holiday pay calculations have moved to an hourly accrual system with a cap of 28 days per year rather than being based on a weekly entitlement. This now eliminates 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 are based upon - "irregular hours workers" and "part-year workers." The vast majority of umbrella employees 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 now accrues 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 now standardise how holiday pay rates are calculated. The rate is 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 is now permitted for umbrella companies and agencies. This controversial method had previously been unlawful as it denied workers their entitlement to paid annual leave.
Under the new regulations, rolling-up holiday pay has now become an option for providers to apply on a case-by-case basis, rather than the previous norm of accruing it over time. This should now simplify payments and administration.
However, a rolled-up holiday pay approach requires 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 expected the majority of umbrellas to continue with the previous 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.
Assessing AWR Implications
Although providing welcome clarity in many areas, the holiday pay reforms created some additional issues for umbrellas to consider around the Agency Worker Regulations (AWR). Providers will have had to review any comparable employees' entitlements under AWR, which may have exceeded the new 28-day statutory minimum.
In cases where a worker's comparator received a greater annual leave allowance, the umbrella may have 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
Since April, all umbrella providers have been required to update their employment contracts, handbooks, and processing systems.
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 will have had to be revised.
The new legislation was a welcome move to provide simplification to the notoriously complex matter of calculating holiday pay for the temporary workforce. With the changes in place, umbrellas should be seeing a reduction in liabilities and standardisation to benefit those affected.
