In a landmark decision by the Supreme Court in July 2022, the Harper Trust Brazil case set a new precedent for holiday pay entitlements, leading to significant regulatory changes that have come into effect from April 1, 2024. This update is crucial for both employers and employees, particularly affecting irregular and part-year workers.
In Essential PAYE & NIC Update for 2024-25 Tax Year for Payroll Purposes, Alexandra Durrant went through everything you need to know about the 2024 Holiday Pay and Entitlement Update.
Background of the Change
Previously, the calculation of holiday pay for workers with variable hours or those employed on a part-year basis was a complex issue, often leading to discrepancies in entitlements. The Supreme Court's ruling in the Harper Trust Brazil case established that all workers with permanent contracts, regardless of their work pattern, are entitled to a full 5.6 weeks (28 days) of holiday pay. This decision prompted a re-evaluation of how holiday pay should be calculated for these groups, culminating in the new regulations set to take effect in the 2024-25 tax year.
Key Changes for 2024-25
Starting April 1, 2024, the way holiday pay is calculated for irregular workers (those whose hours vary week by week) and part-year workers (those who do not work for part of the year) will undergo significant changes. The new regulation stipulates that holiday pay for these groups will be calculated at 12.07% of worked hours, accruing on a weekly or monthly basis, without exceeding the 5.6-week entitlement.
One of the most notable introductions is the legalisation of "rolled up" holiday pay. This allows employers to include holiday pay in regular payroll, rather than accumulating it separately. Employers must clearly show rolled up holiday pay on payslips, ensuring transparency for employees regarding their holiday pay accruals.
Calculating Holiday Pay
The calculation of holiday pay under the new rules involves accruing 12.07% of the hours worked each time an employee works. This percentage is derived from the formula of 5.6 weeks' holiday divided by the 46.4 working weeks (52 weeks minus 5.6 weeks), rounded to 12.07%. For example, if an employee works 10 hours in a week, they would accrue 1.207 hours of holiday.
It's important for employers to ensure that the total holiday entitlement does not exceed 5.6 weeks unless the employee's contract specifies a greater entitlement. In such cases, the percentage used to calculate holiday accrual should be adjusted accordingly.
Implications for Employers and Employees
This update aims to simplify the calculation of holiday pay for irregular and part-year workers, ensuring fairness and transparency in the process. Employers need to be aware of these changes and prepare their payroll systems to comply with the new regulations. It's also vital for employers to communicate these changes effectively to their employees, helping them understand how their holiday pay will be calculated and accrued going forward.
For employees, particularly those with variable hours or part-year contracts, this update provides clarity and certainty about their holiday pay entitlements. It ensures that they are fairly compensated for their holiday time, in line with the Supreme Court's decision.
The 2024 Holiday Pay and Entitlement Update marks a significant shift in how holiday pay is calculated for a substantial portion of the workforce. By understanding these changes, both employers and employees can ensure that they are prepared for the new regulations, fostering a more transparent and equitable workplace environment.
For the full session, please click here. In this course Alexandra Durrant covers the following topics:
- PAYE & National insurance update for 2024/25 tax year
- Employer NIC breaks to encourage employment.
- National Minimum Wage update from 1 April 2024
- Update on maternity, paternity, adoption and shared parental leave/pay provisions for 2024/25
- Holiday pay calculation Update
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.
