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EU law reforms to restore certainty for umbrella workers over holiday pay
- 18 May 2023
With contractors increasingly operating via umbrella companies since the 2017 and 2021 IR35 changes, holiday pay arrangements have come under greater scrutiny by contractors who are new to this way of working.
Over the past two years, IPSE has heard reports of contractors not receiving their holiday pay after failing to claim their entitlement before it expires – with questions over whether their umbrella company did enough to warn them of this.
We were therefore pleased to see that government, which is currently reviewing retained EU employment law, has pledged to introduce rolled-up holiday pay - a move which we think will provide greater certainty to part-time, part-year, agency and umbrella company workers. With the right safeguards in place, these workers will know that they are receiving their due holiday entitlement without fear of missing a deadline to claim it, whilst excercising greater control over their holiday arrangements.
What is rolled-up holiday pay?
Full-time employees have an entitlement to 5.6 weeks of paid time off work each year. Employers don't hold a separate pot of money for this - the employee will just continue to be paid their salary in the usual way whilst using their holiday entitlement. This entitlement expires and renews each year, meaning the employee will lose what they don't use (although some of it can be carried over to the following year in some circumstances). The only circumstance in which an employee can be financially compensated for unused annual leave is if they leave their employment during the leave year.
But the situation is different for workers with irregular arrangements - including for contractors working via umbrella companies. In these instances, the client will pay the contractor's umbrella company an 'assignment rate' which includes a pot of money to fund the leave entitlement that the contractor accrues over the course of their assignment - this is calculated as 12.07% of the contractor's hourly pay and is what we call 'holiday pay'.
This raises the question of what to do with the holiday pay if the contractor doesn't use their holiday entitlement during their assignment, perhaps because they treat their time between assignments as their 'time off'. Rolled-up holiday pay is one means of addressing this.
When holiday pay is 'rolled up', the employer will pay the worker's holiday pay as an additional amount on top of their hourly rate throughout the year. Whilst this does mean that the worker will not be paid during periods of leave taken during an assignment, it does ensure that the funds earmarked to fund their rest period - their holiday pay - is passed on to them.
Why is government reforming holiday pay?
In short, due to a landmark Supreme Court ruling from 2022. Whilst the case of Harpur Trust v Brazel attracted little media attention, the ramifications of the ruling on how employers administer holiday pay have been significant.
Coinciding with this ruling, the government is now reviewing which retained EU law to keep, amend, or jettison, with EU directives such as the Working Time Regulations being considered.
As part of this review, government last week published a consultation on the employment regulations that it intends to keep. It was within this consultation document that government outlined its intentions to introduce rolled-up holiday pay as part of a simplification of the UK’s holiday pay legislation.
Implications of Harpur Trust v Brazel
The Harpur Trust v Brazel case centred on the holiday entitlement of part-year workers, with the ruling finding that part-year workers are legally entitled to the same holiday pay as those working full-year. As a result, employers could no longer calculate holiday pay based solely on hours worked.
To rectify this discrepancy, government is proposing to calculate the holiday pay of irregular hours workers at 12.07% of their hourly rate - and to legally prescribe the practice of 'rolling up' holiday pay into those workers' payslips.
IPSE’s reaction
After previously highlighting the fact that some contractors operating through umbrella companies were missing out on their holiday entitlement, IPSE were pleased to see the government commit to introducing rolled-up holiday pay. This is something that we have long called for and we believe that its introduction will provide agency and umbrella company workers with more certainty over their holiday pay arrangements.
We recently responded to another government consultation on calculating holiday pay and we intend to submit a full written response to this fresh consultation in support of these plans.
Your feedback matters
If you have any thoughts on the planned changes to holiday pay and the introduction of rolled-up holiday pay, we’d love to hear from you.
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