The policy paper Smarter Regulation to Grow the Economy, published on 10 May 2023, gave us a first glimpse of how the government plans to reform employment law post-Brexit – as explained in our previous article. Only two days later, on 12 May 2023, the consultation paper on Retained EU Employment Law and the proposed reforms was published. Separately, and unconnected with reform of EU-derived laws, the government has published more detail on its proposed reform of non-compete clauses (which we have written about here).

Rolled up holiday pay

The consultation confirms that rolled up holiday pay will be allowed.

The term “rolled-up” holiday pay refers to a system in which employers include an employee’s holiday pay within their basic pay (i.e. they “roll” the two payments together). This means that when a worker takes holiday, they do not then get paid holiday pay.

Back in 2006, the ECJ ruled that rolled-up holiday pay is incompatible with the Working Time Directive as it was thought that not paying people when they took holiday would discourage them from taking time off. Despite this, several organisations have continued to run such a scheme especially when they engage casual workers. Employers have also been allowed to offset amounts of rolled-up holiday pay against a worker’s entitlement which has mitigated their financial exposure.

The UK government can clearly see the benefits but, perhaps surprisingly, the consultation states that rolled up holiday pay is being proposed as an option for all workers. We had identified this as a key priority for reform for casual workers who work only occasionally, where it has an obvious benefit in avoiding complexities in trying to calculate holiday entitlement. The consultation suggests it could also be used to calculate and pay holiday for workers who have regular hours, as it may present benefits to both workers and employers (although those benefits are not specified). This makes rolled-up holiday pay something that all companies must consider.

The proposal is for rolled up holiday pay to be paid at 12.07% of pay for hours worked. This represents the proportion of 5.6 weeks of statutory annual leave in relation to working weeks of the year and is already widely used in practice by many employers. The percentage will need to be increased where workers have additional contractual holiday.

The consultation notes that workers would need to be made aware of the change to rolled up holiday pay, and it would need to be clearly marked as holiday pay on payslips. It also brings back the concern mentioned above that workers will not take all of their holiday. This is not addressed in the consultation, and there are no questions about safeguards to ensure that workers do actually take time off.

Holiday entitlement and calculating pay

Currently, employees have two separate holiday entitlements – four weeks’ leave based on EU law and an extra 1.6 weeks’ leave which is a purely UK entitlement. The reform plans are to merge these leave entitlements into one entitlement of 5.6 weeks’ leave.

This has a knock-on effect for various other holiday issues, because the four weeks of EU leave has been subject to different rules as compared to the additional 1.6 weeks of UK leave.

Firstly, there are currently different minimum rates of holiday pay. The 1.6 weeks can be paid based on basic pay (and shift pay), while the four weeks must be paid based on “normal remuneration” covering some additional payments such as regular overtime and commission. There have been various European Court of Justice and domestic decisions on what normal remuneration means, and the law remains unclear. The consultation recognises that requiring employers to pay the full rate for all 5.6 weeks could cause significant additional costs, while reducing the minimum to basic pay would have a financial impact on workers. The paper says that defining “normal remuneration” in legislation would be “significantly challenging” and asks for views from employers and workers on how holiday pay should be defined. There is certainly no easy, or obvious, answer here.

Secondly, the rules on carry-over of leave will need to be clarified. It is proposed that (as is the position now) 1.6 weeks could be carried over by written agreement between the employer and worker, but generally no more. However, the paper indicates that the entire statutory annual leave entitlement could be carried forward if missed due to long-term sick leave or family-related leave. In relation to sick leave, this is potentially more generous than the current law, which only requires carry-over of the four weeks of EU leave which must be used within 18 months from the date it is carried over. Under the new proposed rules, will the whole 5.6 weeks be carried over and will there be no such 18-month restriction? This is unclear.

The consultation paper does not deal with what happens if a worker has wrongly been denied paid leave, such as where they have been mis-classified as an independent contractor. As we have written about in a previous article on the Pimlico Plumbers case, the courts have interpreted EU law as requiring all EU holiday to be carried forward indefinitely in this situation. It is unclear whether the government will be addressing this issue, or whether if will be left for the appeal courts to deal with after the supremacy of EU law has been abolished at the end of the year.

It is also proposed that new starters would accrue their annual leave entitlement at the end of each pay period until the end of their first year of employment. The current law contains two provisions which cause confusion here: there is a one provision limiting the amount of holiday a new starter can take in their first year (so they can’t take it all in one go) and another provision for calculating outstanding holiday pay if their employment is terminated during the holiday year. The government plans to simplify all of this with a single clear method for calculating holiday entitlement in the first year at work, under which workers would build up their holiday entitlement at the end of each pay period. The government had suggested a similar idea in their earlier consultation about holiday entitlement (see below) although this was based on a monthly accrual system, whereas the government are now consulting about a system based on pay periods.

Overlap with other holiday consultation

This consultation does not address how these proposals would fit with the (now closed) consultation on other reforms to holiday entitlement for workers who work only part of the year or irregular hours. We assume that the government still wants to go ahead with reforms outlined in the earlier consultation, but will now be taking things a step further with the latest proposals.

This is our understanding of what all the proposals could mean if put together (subject to the outcome of both consultations).

Recording of working time

The consultation confirms plans to change the legislation to clarify that employers do not have to record daily working hours of their workers, at least for the purposes of complying with the Working Time Regulations. This would remove uncertainty about the legal position in the UK following the ECJ’s ruling in CCOO v Deutsche Bank. As we discuss here, it was not clear that UK employers were impacted by this decision in any case. Also, we wonder how many employers have, in practice, been keeping records and so whether this change will have any significant impact.

The consultation does not refer to national minimum wage compliance in this context. Under current national minimum wage rules, employers still need to keep sufficient records to demonstrate compliance.

TUPE consultation requirements

Currently, there is a requirement to elect employee representatives for consultation on a TUPE transfer where appropriate representatives are not in place already, save for micro-businesses with fewer than 10 employees. Businesses cannot consult employees directly about TUPE transfers. The consultation confirms that this requirement will be removed in two different situations:

• Where the business has fewer than 50 employees, irrespective of the size of the transfer. This extends the current exception for micro-businesses with fewer than 10 employees.
• Where the proposed transfer involves fewer than 10 employees, irrespective of the size of the business. This is most likely to apply to small service provision changes such as outsourcing part of a function. The wording in the consultation paper refers to the numbers actually transferring. However, the consultation requirements in TUPE relate to those “affected” by the transfer, which may include a wider group. The policy paper referred to numbers affected, so it is unclear which calculation is intended to be used.

The consultation paper also makes a general call for how the TUPE regulations “could be improved”. As we have written about here, there are many other aspects of TUPE that are ripe for review, including the question of whether TUPE should apply to workers as well as employees, the EU case law suggesting that employees can transfer to multiple new employers and the special restrictions on changing terms after a transfer. This consultation could provide an opportunity for further changes to be made.

Impact on Northern Ireland

Since employment law is devolved to Northern Ireland the plans outlined in this consultation apply to England, Wales and Scotland only. The position in Northern Ireland will remain unchanged unless, once the Northern Irish legislature is restored, the Northern Ireland Assembly chooses to follow suit with similar proposals.

What next?

Apart from the reforms set out above, the consultation paper states that all other key areas of retained EU employment law will be preserved (in particular, the family friendly rights and the protections for part-time and fixed-term workers). This is with the exception of two sets of regulations related to posted workers and some provisions about European cooperative societies, which are no longer relevant now that the UK has left the EU. This confirms that there is no intended “bonfire” of employment rights at the end of 2023. Nevertheless, the Retained EU Law Bill still contains powers enabling the government to make further reforms and will still end the supremacy of EU law, causing ongoing questions about how remaining EU-derived laws should be interpreted.

Overall, the intended plan of the UK government is to stop and reflect on whether the current employment regulations are fit for purpose and enable businesses to flourish and grow in otherwise uncertain economic (and political) times, which has to be welcomed. It is also good news (and not altogether surprising) that the only way to do that properly is to take time to consider what we want to keep, and change, rather than rushing through a wide-scale revocation of laws and then starting again. That said, there does suddenly feel like there is a lot going on and we could see a great deal of change over coming months, especially because alongside all of the above proposals are the multiple Private Members’ Bills (largely the Employment Bill in disguise) which are currently been backed by the government.

For more detail of what these latest reforms mean for your business, please join us at our webinar where we will be looking at these proposals for retained EU law alongside the planned reform to non-compete clauses.

The consultation is open until 7 July 2023.