Post-Brexit employment law changes last year meant that the “supremacy” and “general principles” of EU law ended on 31 December 2023. The UK government took steps in November 2023 to write various existing EU laws on holiday into new regulations. Otherwise, these EU laws would have disappeared from 1 January 2024, when supremacy of EU law ended. As this legislation only applied in Great Britain (GB), there has been uncertainty in NI over what rules would apply from 1 January 2024 when EU supremacy over UK law ended. Would the EU caselaw still be applicable?

The position has now been resolved with EU case law covering the calculation of normal pay and the carry-over of holidays being ‘written-in’ to the NI Working Time Regulations. The NI regulations, the Working Time (Amendment) Regulations (Northern Ireland) 2023, were introduced on 21 December 2023 and came into force on 1 January 2024.

In summary, the changes confirm that:

• holiday pay must be paid as ‘normal pay’ including overtime and commission. Employers should note that the applicable reference period has been maintained as 12 weeks, as opposed to 52 weeks applicable in GB;
• workers can carry forward unused holiday entitlement in certain circumstances; and
• workers can carry forward holidays they have accrued but were unable to take due to being on sick leave or family leave.

Employers should note that not all the changes introduced in GB are being introduced in NI.

Here’s our explanation of the changes in more detail.

Holiday pay must include overtime and commission

Currently, employees have two separate holiday entitlements:

• four weeks’ leave originally arising from EU law (“EU based leave”); and
• an additional 1.6 weeks’ leave based purely on UK law.

According to EU case law, the 4 weeks’ EU based leave must be paid at ‘normal’ pay, which means any calculation must include regular overtime and commission. In contrast, the additional 1.6 weeks’ leave can – at least for most workers – be paid at basic pay only.

As mentioned above, NI is now following the position in GB. The two distinct pots of annual leave and their associated rates of pay has been maintained. This means that, going forward, workers will continue to have a minimum entitlement of four weeks at normal pay and 1.6 weeks at basic pay.

What is normal pay?

The regulations don’t use the expression ‘normal pay’ but they do say that, going forward, pay for the four week EU-based leave entitlement must include:

• payments, including commission payments, which are intrinsically linked to the performance of tasks which the worker is obliged to carry out under the terms of their contract;
• payments for professional or personal status relating to length of service, seniority or professional qualifications;
• other payments, such as overtime payments, which have been regularly paid to the worker in the 12 weeks preceding the calculation date.

This effectively writes EU caselaw on holiday pay into NI legislation and will reassure those who were concerned that workers would lose out financially if EU holiday rules relating to normal pay were scrapped.

By keeping two distinct pots of leave, the government is preserving the complexity associated with two levels of payment. But, in practice, many employers already take a pragmatic approach, paying all 5.6 weeks annual leave at the higher ‘normal pay’ rate; whereas other employers have payroll systems capable of paying these separately. As the draft regulations maintain the status quo, there’s no need to change this practice.

There are still some employers who have not adjusted their holiday pay approach to reflect EU rules about normal pay. If you’re one of those employers, then you should take advice on moving to a more compliant footing now that it’s clear that the EU rules are being kept rather than scrapped. You may otherwise be vulnerable to backpay claims for miscalculating holidays (which, in Northern Ireland, can potentially date back to 1998 when the NI Working Time Regulations were introduced, or back to the date on which employees commenced employment, whichever is later).

Employers should note that the reference period has been maintained as 12 weeks, as opposed to the 52 weeks applicable in GB. Therefore, if a worker regularly works overtime or receives commission in the 12 weeks immediately preceding a holiday then these payments should be included in the calculation of holiday pay. This goes against the Supreme Court’s findings in the Agnew case that the reference period “is a question of fact” and the “pragmatic reasons” for a 12-month reference period. The regulations do not apply retrospectively but, going forward, employers should review the reference period they use.

What “type” of leave is being taken?

The new regime sheds no light on the ongoing debate about how to tell which type of annual leave entitlement is being taken when. October’s ruling in the Agnew case caused further confusion on this when the Supreme Court concluded that different types of leave are not necessarily taken in sequence and that, if it’s not practical to distinguish between them, all the leave to which a worker is entitled forms part of a single composite pot. If you are paying all holiday at the higher ‘normal pay’ rate, this is less of a concern in practice. If not, the potential for uncertain and complex holiday pay calculations remains and is something that should be addressed through employment contracts or staff handbook. You should take advice on your holiday pay calculation policy or practice.

Rules about carrying forward holiday

The regulations state that workers can carry forward untaken holiday if employers don’t:

• recognise their right to paid annual leave (because, for example, they are wrongly classed as a self-employed independent contractor);
• give them a reasonable opportunity to take leave or encourage them to do so; or
• warn them of the risks of losing their annual leave entitlement at the end of the holiday year.

These carry forward rights apply to the four-week entitlement based on EU law and are intended to restate current EU principles including from the ECJ case of Kreuziger v Berlin.

In practice, the new wording means that the risks of misclassifying someone as a self-employed independent contractor have not gone away or been mitigated. Someone who is wrongly classed as an independent contractor will continue to amass holiday entitlement, with liability only being extinguished once the employer recognises their right to paid annual leave and expressly draws it to their attention. Holidays cannot be carried forward beyond the end of the first full leave year in which the employer observes these rights.

Rules about carrying forward accrued holiday missed due to sickness or maternity leave

Current EU caselaw allows workers to carry forward holidays they have accrued but were unable to take due to being on sick leave or family leave. These rules have been written into legislation, together with some helpful clarity about the long-stop deadline for taking holidays an employee was unable to take due to sick leave. Going forward:

• Workers will be able to carry forward their whole 5.6 weeks’ statutory annual leave entitlement into the next holiday year if they can’t take it due to family leave.
• Workers will be able to carry forward their four weeks’ EU-based annual leave entitlement if they can’t take it because of sick leave but this must be used up within 18 months of the end of the holiday year in which the entitlement originally arose. This will helpfully limit the ability of employees who have been on long term sick leave for many years to accrue a huge entitlement requiring payment on termination of employment.

What isn’t being introduced in Northern Ireland?

In GB, the government has started to use its new powers to reform EU laws. For part-year or irregular hours workers this includes permitting rolled-up holiday pay and a new holiday accrual system. There are also modest reforms to TUPE consultation obligations and record keeping obligations. These changes do not apply in NI where, for example, rolled-up holiday pay remains unlawful.

Is there guidance on the holiday changes?

The Department for Business and Trade has issued guidance on the holiday pay and entitlement reforms from 1 January 2024, which is available here. While this guidance applies to GB and covers the additional changes introduced in GB such as the holiday entitlement accrual mentioned above, paragraphs 4 (carryover of leave) and 5.1 (holiday pay rates) provide helpful guidance relevant to the NI changes.

What should employers do now?

Employers should start reviewing their current approach to holidays against this new system:

• If you have populations of workers who are paid overtime, commission, or allowances etc then double check that this is being factored into their holiday pay correctly.
• If you want to pay holiday at different rates, then you’ll need a system for identifying which type of holidays are which. This has been made more problematic by the recent Supreme Court ruling in Agnew, however, there remains an arguable basis to contend that it’s still possible to direct that holidays are used up in a particular order by setting this out clearly in a contract or policy.
• If you calculate holiday pay based on a 12-month reference period, you should review this (as the reference period has been maintained as 12 weeks). This may involve discussions with your recognised trade union.
• Do you remind workers to use up their holiday entitlement and give them sufficient opportunity to do so? If not, they stand to benefit from the newly-explicit rules about carrying unused leave entitlement forward.
• What is your current policy on accruing holiday during sick leave and maternity leave? Is it in line with the new rules?
• Will any contracts or policies need changing?

Please contact us if you’d like support or further advice on getting to grips with the new regime.

The regulations are available here.