Under recent legislative changes, that have amended the Working Time Regulations 1998, the statutory minimum holiday entitlements will increase from 4 weeks per year to 5.6 week per year by 01 April 2009. This increased the minimum entitlement for an employee working full-time, 5 days a week, from 20 days to 24 days with effect from 1 October 2007, and will increase the entitlement to 28 days after 01 April 2009.

Wind of change

The new regulations are a continuation of the Labour Government’s “family friendly” work policies that have been steadily introduced since 1997. They have also been driven by a significant inequality between workers in the UK and their counterparts in other EU member states. Before 1 October 2007, UK employees were entitled to a minimum of 4 weeks holidays (20 days for an employee working 5 days a week) per year inclusive of public holidays. This was the lowest possible entitlement that the Government could have awarded under the EU’s Working Time Directive. Whilst many UK employers do grant holiday entitlement in excess of the statutory minimum, the average contractual holiday entitlement in the UK is also significantly lower than in other EU member states. For example, in the UK the average number of days holiday for a full time employee with 10 years service is 28 days while the average number of days for a comparable employee in Finland (the most generous of the EU countries) is 44 days. It is not surprising then that the UK is well behind the EU average of 34 days holiday per year.

The changes are expected to affect around 6 million workers in the UK. The biggest impact will be for those in low paid jobs, such as those in the catering and leisure industries and staff who are engaged in shift work. Higher paid workers are less likely to be affected by the changes as most are already contractually entitled to 28 days holiday or more.

The proposals

The increased holiday entitlements will be staggered to help businesses with the financial and organisational transition. From 1 October 2007, employees’ entitlement increased to 4.8 weeks holiday per year, namely 24 days for an employee working 5 days a week. This will rise to a minimum of 5.6 weeks holiday from 1 April 2009, namely 28 days for an employee working 5 days a week.

Employers had very little notice of the changes which came into effect at the beginning of October. There is an interim provision that allows employers to “pay in lieu” of the additional entitlement but to avoid employers abusing the new entitlements this option will disappear after 01 April 2009 (see below). The increased entitlements will be calculated on a pro-rata basis for part-time employees.

Despite the simplicity of the changes, some press reports have convoluted the issue by stating that the new proposals are to give the standard 20 days plus public holidays. Although this may help to explain the thinking of legislators when they proposed the changes, it does not help employers get to grips with the changes and is actually incorrect. There is no right to take a bank holiday off work, as is the case with any other day an employee should normally be working, unless this is expressly stipulated in the employee’s contract. The changes give a right to 28 days holiday for a full time employee working 5 days a week or more, but these days can be given at anytime during the year if the contract gives the employer discretion in relation to when holiday can be taken.

In cases where the contract gives some or all public holidays to employees, these days will count towards the 28 days minimum entitlement. If therefore, an employer already gives 20 days plus public holidays, they will already be in compliance with the new regulations.

The increased entitlements are subject to a cap of 28 days. This will apply where an employee works in excess of 5 days a week. Using the formula, an employee working 6 days a week would be entitled to 33.6 days from 1 April 2009 (6 days x 5.6 weeks = 33.6 days holiday). However, in this case the cap would kick-in and the employee would only be entitled to 28 days holiday.

The employer’s interim right to "pay in lieu"

During the consultation process there was worry among employee representatives and employees who replied to the consultation that employers would abuse any right to make a payment in lieu of the increased holiday entitlement. As a result there is no right to pay in lieu from 01 April 2009 and all employers will have to give 5.6 weeks holiday to their staff.

There is, however, some good news for employers that will help them make operational arrangements: in the period between 01 October 2007 and 01 April 2009, when employees are entitled to 4.8 weeks holiday, there is an interim provision allowing employers to pay in lieu of the increased allowances. This provision was designed to help employers prepare for the changes by recruiting and training additional members of staff to provide cover. Employers will have to pay their employees an additional 0.8 week’s salary. In many cases this will be a simple calculation, however there are complex methods of calculating holiday pay where employees have variable rates of pay where, for example, they earn commission payments or bonuses.

IMPLEMENTING the changes

The new regulations give employers a short timeframe within which to make the necessary changes and to make operational adjustments. Apart from awarding additional holiday or arranging for payments in lieu to be made, the changes will mean many employers have to review their leave policy documentation in order to be compliant and to make their policies clear. As a general rule, employers who already give more than 28 days holiday will be compliant with the law.

If the option to pay in lieu of notice is exercised, the payroll department will need to undertake additional calculations. If employees are to have their holiday entitlements increased, some calculations will need to be made to take account of the increase from 01 October 2007. These calculations will be fairly complex bearing in mind that the changes take effect from both 01 October and 01 April and it is unlikely that either of these dates will coincide with the employer’s holiday year.

In addition to the administrative issues, many businesses may have to revisit the business plan and consider their prices or charge-out rates. Some industries are going to be hit much harder than others by the proposed changes. Those greatly affected will need to consider how their competitors are likely to react to the higher cost base and the potential need to recruit more employees.

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