On 8 November 2023, the Government published its much-anticipated response to key employment law consultations announced earlier this year. The consultations were focused primarily on areas of retained EU employment law where the Government “saw opportunities for improvements” following Brexit. This included reviewing elements of the Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”), the Working Time Regulations (“WTR”) and revisiting the calculation of holiday pay.

Consultations

On 12 May 2023, the Government began a consultation on areas of retained EU law which it had identified as ripe for review, namely:

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

In addition, post the Supreme Court decision in Harpur Trust, the Government also consulted on how best to ensure that part year and irregular hours workers received holiday pay directly proportionate to the time they spent working. As detailed in our earlier post on this case, the impact of Harpur Trust has been that part year workers were entitled to a larger holiday entitlement than part-time workers who had worked the same total number of hours across the year. This anomaly had both cost and employee relations implications for employers.

The Government’s response

  1. Record keeping requirements under the WTR:

The Government has issued legislation to clarify that UK businesses do not have to keep a record of daily working hours for each worker.

Uncertainty as to whether such records needed to be retained arose following a European Court judgement in 2019 (CJEU Federación de Servicios de Comisiones Obreras (“COOO“) v Deutsche Bank SAE). This case held that working time records must be kept showing the number of hours a worker worked each day and each week. This was a surprise to most UK employers as, if the ECJ decision was right, it would mean a more onerous administrative burden on both employers and workers than had previously been the case. The WTR requires only that ‘adequate’ records should be kept in order to demonstrate compliance with specific provisions. It does not prescribe the specific form that working time records should take. Further, HSE guidance from 2019 made clear that ‘there is no specific need to keep records of actual daily working time’ and ‘it is not necessary to create records specifically for the purposes of the WTR, and employers may be able to use existing records kept for other purposes such as pay. If particular workers or groups of workers are unlikely to reach the various limits (e.g., because they always work a set 40-hour week), this requirement can be met simply by making occasional checks to ensure that nothing has changed’. The COOO decision cast serious doubt on whether UK employers had been taking the right approach to working time record keeping.

Implications for employers: The Government’s announcement is good news for employers. The uncertainty created by the COOO decision has been resolved.Employers will only need to follow current – and less onerous – record keeping requirements to show compliance with the WTR. They will not have to keep detailed records of each worker’s daily working hours. Note that other key protections under the WTR will remain in place and are unaffected by the Government’s reforms, including: the 48-hour working week and the ability to opt out of it and rest breaks of 20 minutes for a working day of 6 hours or more.

  • Annual leave and holiday pay calculations under the WTR:

The Government sought responses on whether to: (i) create a single annual leave entitlement of 5.6 weeks (i.e. combining the 4 weeks of so called “Euro” leave and the separate entitlement of 1.6 weeks of leave under the WTR into a single entitlement) ; and (ii) introduce rolled up holiday pay, which would see workers receiving an enhancement of 12.07% in each payslip to cover their holiday pay, as opposed to receiving holiday pay only when they take annual leave.

The Government has opted not to introduce a single annual leave entitlement, preferring instead to keep the ‘pots’ of holiday entitlement separate. The reason for this is that the two separate leave entitlements or pots currently in place are paid at different rates (the 4 weeks of “Euro” leave is paid at the rate of normal remuneration and the additional 1.6 weeks of leave is paid at the basic rate of pay). The Government’s view is that it would only be sensible to move to a single leave entitlement if there is single rate of pay applicable to that entitlement. For now, moving to a single rate of pay for holiday as opposed to the current system of two different rates of pay depending on the type of leave, is seen as too administratively burdensome for employers.

However, the Government says it will legislate to clarify what is meant by “normal remuneration”. This, it says, will allow employers to continue with their current payroll systems whilst clarifying which elements form part of normal remuneration.

In terms of rolled up holiday pay, the Government’s view is that there is little benefit in deploying this for full time or full year workers. Rolled up holiday pay will only be introduced for irregular hours workers and part-year workers (including some agency workers). The Government has confirmed that a worker is an irregular hours worker in relation to a leave year if the number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable.

Implications for employers: The Government’s decision to reject a single leave entitlement will be welcome news for employers. Current arrangements can continue unchanged. However, employers should review the Government’s definition of “normal remuneration” to ensure current arrangements are aligned with the clarification provided. In terms of a return to “rolled up” holiday pay, employers should benefit from the administrative simplicity it will bring to calculating holiday pay for those working irregular hours.  It is notable though that the definition requires the worker to work “wholly or mostly variable” hours in order to be classified as an irregular hours worker. In addition to checking whether its atypical workforce falls within one of the categories of worker than can now receive rolled up holiday pay, the main concern for employers will be that there is limited time to prepare for the switch to rolled up holiday pay. The legislation will be effective from 1 January 2024.

  • Holiday accrual for irregular and part-year workers

As noted above, the Government has decided to introduce rolled up holiday pay for irregular hours works and part-year workers (including some agency workers).

In response to the difficulties created by the Harpur Trust decision, the Government will also legislate to introduce an accrual method to calculate entitlement at 12.07% of hours worked in a pay period for irregular hour workers and part-year workers in the first year of employment and beyond. Other workers will continue to accrue annual leave in their first year of employment as they do now by receiving 1/12th of the statutory entitlement on the first day of each month and to pro-rate it thereafter.

Implications for employers: The Supreme Court judgment in Harpur Trust resulted in part-year workers getting different pro rata amounts of leave (in days or hours) than other workers who work similar hours over the year but with a different work pattern. Tackling this anomaly, through the introduction of a 12.07% accrual method, will no longer result in that outcome. This means that the approach to holiday entitlement and pay for irregular hours workers will be easier for employers to manage from an administration, costs and employee relations perspective. In addition, many employers will be familiar with the 12.07% accrual method, as it had been widely used (and well understood) prior to the Harpur Trust judgment.

  • Consultation requirements under TUPE

Since 2015, TUPE has included a “micro business” exemption, i.e., that employers with fewer than 10 employees can consult directly with those employees in relation to TUPE transfers where there are no existing appropriate representatives or a recognised union. The Government has decided to extend this exemption even further by confirming that small businesses (with fewer than 50 employees) undertaking a transfer of any size, and businesses of any size undertaking a small transfer (of fewer than 10 employees) will be able to consult their employees directly under TUPE if there are no existing worker representatives in place.

Implications for employers: The Government’s decision does not change the need for employers to engage in a proper and effective consultation process. It is also important to note that the exemption does not apply where representatives are already in place, even if the business is small or the number of transferring employees is under 10. Whilst extending flexibility in the way outlined will be viewed positively by employers, it may not have much practical impact. There are likely to be many employers who already opt to consult directly on small transfers where affected employees have consented to direct information and consultation.

  • Other matters

The Government will also restate various pieces of retained EU case law that it considers necessary to retain workers’ overall level of protection and entitlement in relation to the carry-over of annual leave when a worker is unable to take their leave due to being on maternity/family-related leave or sick leave.

Overall

Whilst the reforms do not go as far as some employers would like (particularly in relation to TUPE where many employers hoped to see some flexibility around harmonising terms and conditions of employment), the changes will be viewed positively by most employers. They promise much needed simplicity and flexibility on historically complicated areas of the law which have been heavily litigated in the European and domestic courts.

However, it is worth noting that the reforms are due to come into force from 1 January 2024 and so there is little time for businesses to adapt, particularly if they want to re-introduce rolled up holiday pay quickly. In addition, the Government response promises that “more fundamental” reforms to the rate of holiday pay are being contemplated, so employers will need to continue to monitor developments in this area for some time to come.

You can read the Government’s Response and draft statutory instrument online.