Retained EU Employment Law and holiday entitlement consultations

On 8 November 2023, the Department for Business and Trade published its response to two consultations which ran earlier this year, dealing with record keeping under the Working Time Regulations 1998 (WTR), holiday entitlement and pay also under the WTR, and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). This article summarises the key consultation outcomes, which will be of particular interest to readers whose responsibilities include payroll and HR.

The first consultation was launched in January 2023 and concerned calculating annual leave entitlement for part-year and irregular hours workers.

This was driven by the Supreme Court’s decision in Harpur Trust v Brazel, which resulted in part-year workers potentially being entitled to a greater annual leave entitlement than part-time workers who work the same number of hours across the year. The Government therefore sought views on whether introducing a 52-week reference period for calculating holiday entitlement was the best way to respond to the effects of this judgment.

Then in May 2023, the Government launched another consultation on three areas it believed could benefit from reform and where it could remove unnecessary bureaucracy as part of its Brexit reforms:

• Record keeping requirements under the WTR;
• Simplifying annual leave and holiday pay calculations in the WTR; and
• Consultation requirements under TUPE.

The response to the consultations sets out the reforms the Government are taking forward (set out below) and are intended to help to simplify and address concerns about the calculation of holiday entitlement for employers and make entitlement clearer for all irregular hour’s workers, including part-year workers and agency workers. 

On the same day draft regulations were also published which, if passed, will come into effect on 1 January 2024. These regulations deal with the amendments being made to the holiday provisions in the WTR and TUPE. In respect of record keeping, the consultation indicates that guidance on record keeping will be published shortly.

The Government intends to remove the uncertainly regarding the increased requirements on businesses to keep records established in the 2019 CJEU Federación de Servicios de Comisiones Obreras (CCOO) v Deutsche Bank SAE judgment, which the Government considers were disproportionate to the cost, administrative burden, and the effect on workers.

The CCOO judgment held that objective, reliable and accessible records need to be kept in relation to the right to minimum daily rest breaks, weekly rest periods, and the limit on the maximum weekly working time, whereas the WTR requirement is to keep adequate records to demonstrate compliance with the 48-hour weekly restriction (for workers who have not opted out of it).

Implication for employers: employers will still need to keep adequate records to demonstrate compliance with the WTR, but only as is currently prescribed in the WTR. Guidance will be issued shortly as the Government considers that the existing provisions are misunderstood.

• Calculating holiday entitlement for irregular hours and part-year workers: the Government is introducing an accrual method for calculating holiday entitlement for irregular hour and part-year workers (which will also apply to agency workers but only to the extent they are irregular hours or part-year workers). Entitlement will be calculated as 12.07 percent of hours worked in a pay period in such workers’ first year of employment and beyond. Other regular hours workers will continue to accrue leave at 1/12^th of their entitlement on the first day of each month during their first year of employment. 
  Implication for employers: using the accrual holiday pay calculation method should lead to holiday pay being calculated more accurately as it reflects the precise hours workers have worked. This will deal with the potential for odd results and inaccurate holiday pay calculations produced by the Brazel decision.
  
  
• Single annual leave entitlement: the Government will not create a single annual leave entitlement and will maintain the two existing entitlements to holiday pay so that workers continue to receive 4 weeks at their normal rate of pay (under regulation 13 WTR) and 1.6 weeks at their basic rate of pay (under regulation 13A WTR).
  Implication for employers: there is no change to the current position - there will still be two types of annual leave, which are calculated differently.
  
  
• Normal remuneration: the Government will legislate to provide clarification on what is regarded as normal remuneration. This will not be an easy task and is likely to be contentious in the drafting. The draft legislation defines a week’s pay (i.e. normal remuneration) to include commissions payments linked to personal performance, ‘regular’ overtime payments and allowances relating to status and other matters personal to the individual (e.g. length of service), which aligns with the elements of pay currently included in the holiday pay calculation, developed in case law. Performance-related bonuses are not explicitly mentioned in the draft definition but could be interpreted as being included in the holiday pay calculation as they fall under ‘other payments’, subject to them being regularly paid in the preceding 52 weeks from the calculation date.
  Implication for employers: employers need to understand how the regulatory wording impacts them and their pay practices and consider whether any changes to calculations are needed. 
  
  
• Rolled-up holiday pay: the regulations will permit rolled-up holiday pay for irregular hours workers and part-year workers only (which will also apply to agency workers but only to the extent they are irregular hours or part-year workers).  
  Implication for employers: this should ease the administrative burden for employers to calculate holiday pay for such workers. This has been a ‘hot potato’ issue for years. Employers will see this as a very pragmatic response to a difficult issue. Opponents will worry about the disincentive this will give to such workers to take proper holidays and the impact on their health & safety, particularly given that this will inevitably (albeit not exclusively) have more of an impact on lower paid workers.
  
  
• Method of calculating rolled-up holiday pay if you have two rates of holiday pay: the Government will legislate to ensure that all employers that choose to use rolled-up holiday pay calculate it based on a worker’s total earnings in a pay period.
  Implication for employers: this will simplify the rolled-up holiday calculation for employers, minimising calculation complexity as most workers’ basic pay is their normal rate of remuneration.
  
  
• Definition of irregular hour workers and part-year workers: the Government will define in legislation what is meant by irregular hours workers and part-year workers, so it is clear who is captured.
  Implication for employers: defining the two types of workers is intended to bring clarity for employers. However, the definition in the draft legislation leaves scope for uncertainty in terms of which workers fall in each category. Employers should consider how the definitions apply to the different parts of their workforce and document decisions as to why they fall within the definition, so that they have a clear decision audit trail.

Employers who already have employee representative bodies for the purposes of TUPE and the Trade Union and Labour Relations (Consolidation) Act 1992 will still have to consult with the representatives, regardless of the number of employees transferring across.

On the broader topic of whether any other changes to the TUPE regulations were required, responses highlighted the need for greater clarity around:

• Changing terms and conditions of employees post-transfer: currently, changes to terms and conditions related to the transfer are only permitted for an economic, technical or organisational (ETO) reason entailing changes in the workforce. However, many employers struggle to ascertain whether proposed changes would fall into the ETO category, calling for greater certainty in the area;
• Whether TUPE applies to workers as well as employees: the definition of ‘employee’ in the TUPE regulations is wider than normally used, leading to a lack of certainty over whether workers would transfer across as part of TUPE. This means employers need to decide between being cautious and transferring all workers across or retaining workers with the risk that their decision might be challenged; and   
• Clarity on the ECJ case law stating that a contract of employment can be split across multiple transferees: in the Govaerts case (ISS Facility Services v Govaerts (C-344/18) EU:C:2020:239), the ECJ held that where a service is being transferred to multiple contractors (‘fragmentation’), it was possible for an employment contract to transfer from a single employer to multiple part-time contracts with different employers. This raises many practical questions for both transferors and transferees, which could be addressed with further guidance.

The Government has stated that whilst it is monitoring these issues, there are no immediate plans for change. In relation to changing terms and conditions of employment, the Government feels that the current requirement for an ‘economic, technical or organisational’ (ETO) reason for the changes strikes the right balance between allowing flexibility and protecting the rights of individual employees. Most practitioners will consider that the Government has dodged the difficult exam question here – in practice the ETO reason has been defined very narrowly and causes lots of headaches for employers.

KPMG LLP responded to the consultations. The Government’s response can be found here.

For more information on how KPMG and our multi-disciplinary team of employment law, employment tax, payroll and reward specialists can help you navigate your WTR, holiday pay and entitlements, and TUPE obligations, please get in touch with Donna Sharp, or your regular KPMG in the UK contact.

For further information please contact:

• Donna Sharp