Increasing statutory holiday pay - Proposal for a phased increase to 28 days holiday each year

Note: The changes to holiday entitlements described below already affect employers with holiday years starting November 2006 or later.

In June 2006, the Department of Trade and Industry (DTI) published the Government's proposals to increase the annual statutory leave entitlement, as set out in the Working Time Regulations 1998, from 4 weeks to 5.6 weeks - effectively an additional 8 days for a five-day worker. The intention of the change is to ensure that all workers receive the equivalent of four weeks' holiday each year in addition to bank holidays. In the consultation document, the DTI asked for views on a number of proposals, in particular:

• an option to carry forward up to 8 of the 28 days to the following holiday year
  
  
• an option to "buy out" some of the extra 8 days
  
  
• a phased introduction of the new entitlements, starting with an increase to 24 days (4.8 weeks) from 1 October 2007
  
  
• the introduction of the remaining 4 days in October 2008, or in October 2009, or 2 days in 2008 and 2 days in 2009.

The DTI has now published a further consultation document. It indicates the Government's intentions in the light of the comments already received and seeks further views on the draft Regulations, how the change should be implemented and what guidance should be given to employers. The document also includes a draft version of the Annual Leave (Amendment to Working Time Legislation) Regulations 2007, which will make changes to the Working Time Regulations 1998 and to the equivalent Regulations for workers in inland waterways and sea fishermen. These Regulations are referred to as the "Amendment Regulations" in these notes.

Scope

The proposals will apply to all workers covered by the Working Time Regulations 1998, including agency workers. They will also apply to workers with their own equivalent working time provisions, namely the Road Transport Regulations 2005, the Fishing Vessels (Working Time: Sea-fishermen) Regulations 2004 and the Merchant Shipping (Working Time: Inland Waterways) Regulations 2003.

They will not, however, apply to agricultural workers in Scotland covered by Orders made by the Scottish Agricultural Wages Board or to workers covered by the Civil Aviation (Working Time) Regulations 2004 or the Merchant Shipping (Hours of Work) Regulations 2002.

The proposals do not apply to Northern Ireland. A separate consultation document was issued by the Department for Employment and Learning in July 2006, in particular to seek views on whether Regulations should accommodate the 10 bank holidays that apply in Northern Ireland. No decision on that issue has been published yet.

New entitlements

The proposals are that the current four weeks' annual leave entitlement will be supplemented by an additional leave period of 1.6 weeks, introduced in two stages, namely

• an additional 0.8 weeks from 1 October 2007, and
• a further 0.8 weeks from 1 October 2008.

The resulting 5.6 weeks will be subject to an absolute maximum of 28 days. This gives five-day workers an entitlement to 28 days paid leave in a year but limits the number of days leave for six-day workers to their current 24 days, plus an additional four days only.

These are statutory minimum entitlements and do not prevent employers from providing greater contractual entitlement, as many already do. As all paid days of holiday count towards the statutory entitlement, including paid bank holidays, many employers will realise at this point that they are already providing at least 28 days paid holiday to their five-day workers - the minimum entitlement from October 2008.

Payment in lieu of taking holiday

One of the options considered in the consultation process was to allow employers to pay in lieu of the additional entitlement. In the light of comments received, that such an arrangement would be open to abuse and, in any case, contrary to the objective of ensuring that all workers have four weeks' holiday in addition to bank holidays, the Government has decided not to allow any of the additional entitlement to be "bought out", other than on termination of employment. However, the Regulations do not prevent employers buying out holiday entitlement in excess of the 5.6 statutory weeks.

Carrying holiday over to the following holiday year

Another consultation option was the facility to carry leave over from one year to the next. Concerns over the potential increase in administration that this might cause were outweighed by the effect that not being able to carry the additional leave forward would have on employers who already provide more than the new entitlements and permit days in excess of four weeks to be carried forward, for example to make extended family visits abroad possible. The Amendment Regulations will allow, therefore, for some or all of the additional entitlement to be carried forward to the next holiday year, subject to contractual arrangements.

Transitional arrangements

The transitional rules will require workers' entitlements to be increased in proportion to the period remaining of their holiday year at each October.

Example: A workers' holiday year runs from the beginning of January. There are three months of the holiday year remaining at each October. The statutory holiday leave

• in the leave year starting January 2007 is 4.2 weeks, i.e.
  
  
  • 4 weeks annual leave entitlement, plus
    
    
  • 0.2 weeks additional leave entitlement (for October to December 2007), i.e. 0.8 weeks × 3 ÷12.
    
    

• in the leave year starting January 2008 is 5 weeks, i.e.
  
  
  • 4 weeks annual leave entitlement, plus
    
    
  • 0.6 weeks additional leave entitlement (for January to September 2008), i.e. 0.8 weeks × 9 ÷12, plus
    
    
  • 0.4 weeks additional leave entitlement (for October to December 2008), i.e. 1.6 weeks × 3 ÷12
    
    

• in the leave year starting January 2009 is 5.6 weeks, i.e.
  
  
  • annual leave entitlement is 4 weeks, plus
  • 1.6 weeks additional leave entitlement.

The Amendment Regulations do not define the way in which the "proportion" of the period remaining of a holiday year should be calculated. The example above, which is based on the DTI's own example, uses whole calendar months. As most employer's holiday years run from the start of a month, whole months can be used to calculate the proportion. If a holiday year starts mid-month, a proportion using the number of weeks or days remaining in the holiday year would have to be used.

Transferring the results from the example to actual working arrangements introduces the problem of rounding when calculating entitlements. The problem already exists but is aggravated by the additional entitlements not being whole weeks. The following chart shows the new entitlements from the example above for workers who work from one to six days in a week.

• in the leave year starting May 2007 is 4.467 weeks, i.e.
  
  
  • 4 weeks annual leave entitlement, plus
    
    
  • 0.467 weeks additional leave entitlement (for October 2007 to April 2008), i.e. 0.8 weeks × 7 ÷12.
    
    

• in the leave year starting May 2008 is 5.267 weeks
  
  
  • annual leave entitlement is 4 weeks, plus
    
    
  • 0.333 weeks additional leave entitlement (for May to September 2008), i.e. 0.8 weeks × 5 ÷12, plus
    
    
  • 0.933 weeks additional leave entitlement (for October 2008 to April 2009), i.e. 1.6 weeks × 7 ÷12
    
    

• in the leave year starting May 2009 is 5.6 weeks, i.e.
  
  
  • annual leave entitlement is 4 weeks, plus
  • 1.6 weeks additional leave entitlement.

Transferring those annual entitlements to workers who work different numbers of days each week gives the following results.

1. the calculation of annual leave entitlement for new workers, and
2. the calculation of annual and additional leave entitlement from October 2007

is that the minimum statutory entitlement will, in many cases, include decimal fractions. So, for example,

1. the new worker described above will be entitled to 13.1 days paid holiday in the remainder of the holiday year, not 14 days,
   
   
2. a current four-day worker with a holiday year starting in May will be entitled to 17.87 days of paid holiday from May 2007 and 21.07 days from May 2008.

Employers may, if they wish, round the minimum entitlements up for administrative convenience and, of course, many employers are already providing holiday entitlements in excess of the October 2008 entitlement of 5.6 weeks when bank holidays are included. But those employers who include bank holidays in the 4 weeks entitlement are likely to have great difficulty in handling holiday entitlements that include decimal fractions. How is an employer to give a worker 0.1 paid days holiday, as example (a), or 0.07 paid days holiday, as example (b)? The entitlements may not be rounded down. But perhaps that dilemma is better than being required to round 0.1 or 0.07 days up to a whole day of paid holiday.

Accrual in the first year of employment

The Working Time Regulations include a special provision, enabling employers to limit the rate at which a worker takes paid leave in the first year of employment. It is an accrual arrangement that limits a worker, if the employer wishes to use the facility, to one twelfth of the annual four-week entitlement in the first month of employment, two twelfths in the first two months, three-twelfths in the first three months, and so on. The result of this calculation, as long as it is not an exact half or whole day, is rounded up to the next half or whole day.

The Amendment Regulations make provision for this same approach to apply to the additional leave entitlement. For example, an employment with a leave year starting April 2007 has a leave entitlement of 4.4 weeks. If a five-day worker starts in that employment on 4 June 2007, the employer may, by applying the special accrual rules, limit the holiday taken in

• the first month, i.e. up to 3 July 2007, to 1.83 days, i.e. 4.4 × 5 ÷ 12, rounded up to 2 days,
  
  
• the first two months, i.e. up to 3 August 2007, to 3.67 days, i.e. 4.4 × 5 ÷ 6, rounded up to 4 days,
  
  
• the first three months, i.e. up to 3 September 2007, to 5.5 days, i.e. 4.4 × 5 ÷ 4, with no rounding required,

and so on for twelve months.

Calculating weekly working hours

The Working Time Regulations limit the average number of hours that a worker may work in a "reference period" to 48 hours per week. The reference period is a period of 17 weeks, although it can be extended to 26 weeks or to 52 weeks in certain circumstances. The average number of hours per week is calculated by dividing the number of hours worked in the reference period by the number of weeks in the reference period. However, if there are any "excluded days" in the reference period, the number of hours worked in the equivalent number of days following the end of the reference period must be added to the total number of hours worked.

Any part of the four weeks annual holiday entitlement that falls within a reference period is treated as being "excluded days", with the result that paid leave cannot be used to reduce the average hours worked in a reference period. However, the Amendment Regulations make no changes to this arrangement, with the effect that any days of additional statutory holidays are not excluded days and therefore serve to reduce the average worked hours in the reference period.

Understanding the new entitlements

The current right to four weeks' paid annual leave, as set out in the Working Time Regulations 1998, meets the UK's obligations under the European Working Time Directive. Not having any statutory authority of its own to increase the four-week period of holiday leave, the Government gave itself the necessary domestic powers by means of provisions in the Work and Families Act 2006. These powers allow the Government to change almost any aspect of statutory holiday pay as long as the minimum requirements of the Working Time Directive are maintained.

The distinction between the holiday entitlement provided under the Working Time Directive and the additional entitlement provided under the Work and Families Act is maintained in the way that the new provisions have been added to the Working Time Regulations 1998. In particular, a workers' "annual leave" is still fixed at four weeks - the extra 1.6 days is defined separately as "additional leave". They are two separate entitlements and, by treating them separately in the Regulations, the Government is able to apply different rules to each of them. The principal differences in the rules are:

• Additional leave may be carried forward by agreement to the next leave year but annual leave may not.
  
  
• Days of annual leave are "excluded days" for the purpose of calculating average weekly hours but days of additional leave are not.
  
  
• Workers covered by the Agricultural Wages (Scotland) Act 1949 are entitled to annual leave but are excluded from entitlement to additional leave as the holiday entitlement of such workers has been devolved to the Scottish Parliament.

Other holiday provisions

The changes made by the Amendment Regulations only affect holiday entitlement and how the additional entitlement must be handled. Other holiday provisions in the Working Time Regulations, including the calculation of a week's pay, are unchanged. Employers may continue to require holidays to be taken at specific times, e.g. plant closures and bank holidays, set notice periods for booking holidays, and refuse requests to take leave, e.g. at peak work times.

Cost impact on businesses

The Government estimates that the cost of introducing additional leave will be between £3.3 and 4.4 billion, spread over the transition period. However, there should be no impact on those employers who already provide at least 28 paid days holiday, or 20 days holiday plus bank holidays, other than where

• workers are given a day off in lieu of a bank holiday because they are required to take leave on the bank holiday but were taking some other form of paid leave (e.g. maternity or sick leave) on that day, or
  
  
• the employer currently buys out holiday entitlement in excess of four weeks but will only be able to buy out holiday entitlement in excess of 5.6 weeks under the new rules.

Of particular note for employers in hospitality and retail, where the impact is expected to be the greatest, the Government has passed on its research and summary of consultation responses to the Low Pay Commission, requesting that the impact of the increased holiday entitlement be taken into account when recommending the future level of the National Minimum Wage.

Timetable for introduction

The further consultation period will end on 13 April 2007 and the Government's response will be published within three months of that date. Regulations will be laid before Parliament no later that three months before coming into effect on 1 October 2007. The Regulations will follow the affirmative resolution procedure, requiring consideration and debate by both Houses of Parliament for approval.

...UK Payroll News - Latest

Further information:
Increasing the holiday entitlement - a further consultation
Summary of consultation responses and the Government's response to the consultation

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