Recent legislative changes on retained EU employment law issues

This draft legislation – some of which is due to take effect on 1 January 2024 – sits alongside the Government’s response to two consultations on these changes which were also released earlier this month. The draft legislation also makes changes to the reporting requirements under the WTR and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

This article will explore what changes will be introduced by the Government’s much anticipated response, and how they might affect employers.

The Government’s response and the draft legislation cover three key areas:

1.Holiday entitlement

Key changes in the draft legislation revolve around holiday entitlement. These changes will only apply for irregular hours and part year workers and will only apply for holiday years starting on or after 1 April 2024. If an employer’s leave year is a calendar year, the rules won’t apply until 1 January 2025.

A worker is an irregular hours worker 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 if under the terms of their contract, they are required to work only part of that year and there are periods within that year of at least a week which they are not required to work and for which they are not paid.

The changes the Government are introducing are:

Calculating holiday entitlement

Following the case of Harper v Brazel [2002], there was significant confusion around this area. This case provided authority for the principle that part year workers could accumulate a greater holiday entitlement than part-time workers who had worked the same total number of hours across the year. It also ruled that employers should not use the 12.07% calculation for holiday pay. This created additional complexities for employers, producing both costs and employee relation consequences for employers.

The draft legislation demonstrates that the Government did not agree with the outcome in the above case. Employers will now be entitled to calculate holiday entitlement for irregular hours workers and part year workers using the 12.07% accrual method. Workers will accrue holiday entitlement in each pay period, at 12.07% of the number of hours that they have worked during each pay period. This entitlement is however, capped. A worker cannot accrue more than 28 days of annual leave in any leave year. If the amount of annual leave that has accrued includes a fraction of an hour, the fraction is to be treated as zero if it is less than 30 minutes (rounded down), and 1 hour if it is 30 minutes or more (rounded up).

This holiday accrual calculation method better reflects what workers have actually worked in the current leave year, as annual leave is accrued based on time worked each pay period.

Rolled up holiday pay

Rolled up holiday pay is where employers pay their workers a sum in addition to their normal hourly rate of pay to represent their holiday pay entitlement. This was banned in 2006. In a move that many employers with casual staff will welcome, holiday pay calculations have now been simplified by the removal of the ban of rolled-up holiday pay for part-year workers and those who work irregular hours. This means employers can choose to pay such workers a supplementary amount (12.07%) on top of their normal pay to cover holiday pay, as opposed to paying them when they take annual leave. This change should help reduce the administrative burden for employers, although again those with regular hours of work will not be affected by this change.

Holiday entitlement for those on long-term sick leave or family leave

For those irregular hours or part year workers who are on long-term sick leave or family leave they will continue to accrue holiday entitlement at the 12.07% rate. The 12.07% rate is applied to the average weekly hours worked by the worker in the 52 weeks before the worker started that leave. The 52 weeks includes weeks during which the worker did not work any hours and but not weeks in which the worker was on statutory leave or sick leave in the calculation, so it is proportionate to the time truly worked.

Holiday rollover

During the COVID pandemic legislation was introduced to allow workers to carry over annual leave for two holiday years. This has now been revoked.

These changes are likely to come as a relief to employers, especially those who have a lot of casual staff or those in the education sector who have a lot of term time workers, after years of complex and confusing case law decisions involving holiday entitlement and pay calculations. In preparation for the upcoming reforms, it would be advisable for employers to review and update their holiday policies and procedures and employment contracts should be checked to see if amendments are required. The Government has left the practicalities of how irregular hours and part year workers can book and take annual leave to the discretion of the employer, and employers should ensure there is a consistent approach taken going forward. Those who do employ irregular hours and part year workers should compare how their business currently calculates holiday pay to the new 12.07% calculation and contemplate whether switching to rolled-up holiday pay would be more beneficial. Employers should also consider whether their payroll systems are set up in a way that can deal with these changes, and they will be required to clearly mark rolled-up holiday pay as separate items in payslips.

These changes are expected to apply for holiday years from 1 April 2024. In practice, rolled-up holiday pay is still used in many sectors, and employers who are already using this method in breach of the current legislation should be aware that they remain at risk until then. This legislation is not retrospective so any existing potential liability for failure to comply with the current law on the calculation of holiday entitlement and pay is not erased by these changes.

The Government has also vowed to legislate further in the future to clarify what is meant by ‘normal remuneration’ and to implement ‘more fundamental’ reforms around holiday pay, so employers should keep an eye on developments on this area over the coming months.

2.Reporting requirements under the WTR

In recent years there has been uncertainty as to whether daily working hour records need to be retained for each individual worker, following a European Court judgment in 2019 (CCOO v Deutsche Bank). Despite the WTR requiring only ‘adequate’ records to be kept (for maximum weekly working time, maximum working time for young workers and the length of night work) this case unexpectedly suggested that employers should retain daily working hour records. To do so meant a huge administrative burden for both employers and workers.

The Government has concluded that this ruling was disproportionate, and the new regulations have added wording to the WTR with effect from 1 January 2024 to clarify that “an employer need not record each worker’s daily working hours ………. if the employer is able to demonstrate compliance without doing so”.

This change will be appreciated by employers, as it removes the unreasonable administrative burden for them for employees who were never in danger of approaching the 48-hour weekly limit. There is still no explicit obligation to keep any records to show compliance with daily or weekly rest periods or rest breaks.

3.TUPE

The current TUPE consultation requirements allow microbusinesses (with fewer than 10 employees) who do not have appropriate representatives in place (e.g. a recognised trade union or works council) to choose not to elect employee representatives and instead inform and consult directly with the affected employees.

From 1 July 2024 the ability to choose to inform and consult directly with the affected employees will be widened to (a) small businesses (fewer than 50 employees) undertaking a transfer of any size, or (b) businesses of any size undertaking transfers involving fewer than 10 employees save where there are already appropriate representatives in place.

This increased flexibility will still be welcomed by businesses, particularly small businesses, as it should speed up the information and consultation process by removing the need to go through a process of electing representatives. Small businesses are more likely to have closer personal relationships with their employees and will often prefer to speak to the employees directly rather than through representatives.

The Government have noted that they will continue to keep an eye on how the TUPE regulations could be improved in the future, including the thorny question of whether TUPE also applies to workers as well as employees. Whilst the present reforms are limited, it is encouraging that these areas remain on the Government’s radar.

How to prepare for changes ahead

There are some real practical implications for employers. Importantly, the reforms around holiday entitlement will apply to holiday years beginning on or after 1 April 2024. This doesn’t leave employers with much time to adapt, especially if they are wanting to introduce rolled-up holiday pay, and employers should mark this date in their diary. Given the tight turnaround, employers should seek legal advice now to ensure they are prepared for these changes.

Overall, whilst the reforms may not go as far as many employers would like, the changes are likely to be a welcome outcome for employers, especially those who employ atypical workers. The new regulations are still in the process of being finalised, although no meaningful changes are expected. Whilst frustrating for employers, the reforms are pledging much needed simplicity and flexibility on areas that have traditionally been overly complicated and heavily litigated.

How can we help?

At Ward Hadaway we have significant experience in providing advice to employers on all of the above topics, and can help guide employers through the changes. If you have any questions relating to anything discussed in the article or if you would like advice on any other matter please do get in touch one of our expert Employment lawyers.