Joanne Moseley 0:29

Hello and welcome to Employment Talk, the podcast where we explore the HR issues that matter to you and your organisation and keep you up to date with what's going on in the world of employment law. My name is Joanne Moseley and I'm joined as usual by the fabulous Elaine Huttley who heads up our employment team. How are you doing Elaine? Are you looking forward to the school holidays?

Elaine Huttley 0:51

I am good, thanks Jo. And I do like the school holidays. I know lots of people don't, but I guess my kids are a bit older now, so they're fairly independent. But I do like it. How about you, Jo? How are you?

Joanne Moseley 1:03

Yeah, I'm all right, thank you. Sadly, I've had my holidays now, so, you know, while everybody else is going off, I'm sort of stuck at work, but never mind.

Elaine Huttley 1:07

Ahh.

Yes, I am one of those annoying people that I've still got one of mine to come. So roll on a couple of weeks so I can break up.

Joanne Moseley 1:19

Lovely. Well, today I thought we'd return to a topic that many employers probably hope to become a little bit quieter and that's holiday pay. And of course, we've spoken before about the new record keeping requirements that came into force earlier this year. But there's another development on the horizon that employers really need to have on their radar and that's state enforcement of holiday pay.

Elaine Huttley 1:42

I think that's a great topic, Jo, because many employers still see holiday pay disputes as something that they only have to think about if an employee complains that they're being underpaid. And we do see some claims being instigated by unions on behalf of employees, but by and large, it's generally left to the individual to bring claims in the tribunal

Joanne Moseley 1:54

Mm.

Elaine Huttley 2:04

if they can't resolve it with their employer in the first instance.

Joanne Moseley 2:08

Yeah, yeah, that's true. But the government wants the state to take a proactive role in enforcing individual rights to receive the correct amount of holiday pay, and that's a big shift. It is. So can you start then, Elaine, by explaining how it proposes to do that?

Elaine Huttley 2:19

It is, isn't it?

But before I do that, I should say that the government has launched A consultation about this. So some of what I'm going to say is fixed in the sense that the framework is set out in the Employment Rights Act and it won't therefore change. Other things might though, depending on what the evidence that the government receives from the consultation.

Joanne Moseley 2:48

Okay, let's start then with what we do know.

Elaine Huttley 2:51

Okay, so as I've said at the moment, if a worker thinks that they've been underpaid holiday pay, they generally have to bring a claim themselves and the government doesn't think that this is particularly fair or efficient and it wants a system where enforcement doesn't rely solely on individuals taking action, dum, dum, dum, the Fair Work Agency.

So that's only just been set up earlier this year, Jo, we've discussed it in an earlier podcast, but the Fair Work Agency will be able to force employers to pay their staff the correct amount of holiday pay through a range of mechanisms, all of which operate outside of the tribunal system.

Joanne Moseley 3:29

So we're moving effectively from a complaints-led system to something more akin to HMRC's enforcement of the national minimum wage.

Elaine Huttley 3:38

Yeah, that's right. And it's a really good comparison because of course, the Fair Work Agency has taken over responsibility for national minimum wage compliance too, as well as some of the functions.

Joanne Moseley 3:50

Why is the government focusing on holiday pay, do you think?

Elaine Huttley 3:54

I think it's because the government believes that underpayment is a significant problem.

Joanne Moseley 4:00

I mean, my gut feeling is that is probably right, but...

Probably because it's not always straightforward, the calculations. So does the government have any evidence to back up why it thinks that there's a significant problem with holiday pay?

Elaine Huttley 4:17

Yeah, apparently so. So the government does cite research suggesting that around 2.2 million jobs did not receive any paid annual leave entitlements in 2025. And going back earlier than that, the analysis by the TUC suggests that around 1.1 million workers were not given any holiday pay in 2023.

Joanne Moseley 4:29

Mm.

Elaine Huttley 4:39

and they calculated that this equated to 2 billion pounds in lost holiday pay, which works out as an average of around 1800 pounds per worker.

Joanne Moseley 4:50

Wow. I mean, I think the only thing I'd say to that, though, is that these are estimates, aren't they, rather than a robust measure of holiday pay non-compliance.

Elaine Huttley 5:01

Yeah, and the government does acknowledge that too. But it's also looked at how many people bring holiday pay claims by analysing data from ACAS and Employment Tribunal receipts. And both suggest that the number of people who bring these types of claiming is low. And I think it suggested a maximum of 13,000 pound.

sorry, 13,000 people per year. And so based on this, the government believes that non-compliance is widespread enough to justify regulatory intervention rather than relying solely on individual workers bringing claims.

Joanne Moseley 5:23

Mm.

Okay, so does the government say whether employers aren't paying their staff the right amount of holiday pay because they can get away with it or because they're making genuine errors?

Elaine Huttley 5:45

It suggests that the biggest factor is complexity. And as you know, Jo, and I don't say this slightly being a holiday pay guru, despite, I know, despite making changes to the working time regulations in 2024, it's still not always easy to work out how much holiday pay an employee should get.

Joanne Moseley 5:54

Get me.

Elaine Huttley 6:04

particularly if those people who work some overtime receive commission or bonus payments or receive additional payments are linked to the work that they do.

Joanne Moseley 6:14

I agree, I agree. The regulations now, of course, expressly set out the types of payments you have to include in holiday pay, but employers still have to use their judgement to decide whether they apply to their staff who may have different patterns of working. So I'll give you an example. The regulations say you have to include other payments such as overtime,

which have been regularly paid to a worker in the 52 weeks before the calculation date. But it doesn't explain what regular means. So does it mean every month, every other month, or just at certain times of the year? And of course, we've got some cases which give us a steer on those answers, but most employers won't be aware of them.

And many employers won't have the financial wriggle room either to take the most expensive option, which is to include everything, on the basis that it poses less of a litigation risk. Not to mention the fact that depending on the type of contract the employee has, an employer can treat the first four weeks of leave under regulation 13

differently from the remaining 1.6 weeks, unless they are an irregular or part year worker. And of course, those two concepts were introduced in 2024 and they've got a specific definition.

Elaine Huttley 7:32

Yeah, you're right, Jo. It's complicated. I would even say horribly complicated. And we are still asked to advise on this from time to time. And that's usually where a worker has complained and the employer has to consider whether its working model is correct. And a lot of the times, unfortunately, the model isn't always correct.

Joanne Moseley 7:48

Mm.

Elaine Huttley 7:51

and has been misapplied. So to go back to your original question, Jo, employers that are getting this wrong usually haven't done it deliberately. They've made mistakes because the rules are genuinely difficult to apply in practise.

Joanne Moseley 8:05

Yeah, yeah. Okay then, so let's focus on what the Fair Work Agency is going to be able to do. I assume it's only going to be able to deal with statutory holiday, which is 5.6 weeks per year for all workers.

Elaine Huttley 8:19

Yeah, that's right. So the agency won't get involved in pursuing claims for any additional contractual holiday. Employees are on their own with that one. But in terms of the statutory holiday, it will be able to enforce underpayments, non-payment and incorrect calculations, which will include where the employer has refused to allow a worker to take all of their leave or refused

Joanne Moseley 8:35

Mhm.

Elaine Huttley 8:43

them, sorry, refuse to allow them to carry over leave from one year to the next.

Joanne Moseley 8:49

Yeah, and on that last point, it's also worth reminding our listeners that the working time regulations now clearly set out when leave can be carried over, how much leave gets carried over and when this expires and the rules differ depending on why the employer hasn't taken holiday in the 1st place.

So, for example, an employee who's been on long term absence due to illness can usually only carry over up to four weeks leave from the end of the holiday year it accrues, but they have to take it within 18 months of that date, otherwise they lose it. Whereas if you've wrongly treated your

your worker as being self-employed and they therefore haven't received any paid holiday, four weeks leave keeps rolling over until the end of the first full leave year in which the employer allows them to take paid holiday. And as we've seen from cases in the past, that can go back many years.

Elaine Huttley 9:48

Yeah.

Joanne Moseley 9:50

Okay, so one question employers are likely to ask is whether the Fair Work Agency will investigate every underpayment of statutory holiday.

Elaine Huttley 9:59

It doesn't look like it. The consultation suggests that the agency is likely to focus its resources on sectors and employers where there's evidence of wider non-compliance. We see something similar with national minimum wage enforcement. The regulator doesn't inspect every employer. Instead, it takes a more risk-based approach.

Presumably employees will be able to complain though to the agency if they don't think their holiday pay is correct.

Yes, yeah, they can. And I suspect people will be able to submit a request via the agency's website, but they might also have a telephone number that people can use and we'll just have to wait and see. Workers will, though, have to keep an eye on time limits that apply because if the agency doesn't investigate their claim, then they will have to bring an individual claim in the Employment Tribunal. And if they miss that window, then they may lose their opportunity

Recover any monies that they're owed.

Yeah, that's an interesting point. State enforcement of holiday pay won't replace a worker's right to make an employment claim. But if both processes are pursued, as I understand it, the employee won't be able to recover the same arrears from the tribunal and the agency, which of course makes perfect sense.

Yeah, in reality, if the agency decides that a worker has been underpaid, they're likely to recover that much that money much more quickly than the tribunal. We both know, Jo, the tribunal system is under considerable pressure and delays in getting even relatively simple one day cases listed are very common.

Mm.

That's one of the reasons why the government is giving the powers to the agency because it wants to speed up this process from workers and potentially as well to alleviate some of the pressure from the tribunal system I think.

Yeah, yeah. So let's assume then that the agency receives a complaint and it decides to investigate. What powers does it have to force employers to pay the right amount of holiday for its workers?

So it's got two main powers. It can investigate and it has the power to go into premises and inspect records. And if it finds that you've underpaid your staff, it can issue a notice of underpayment and impose financial penalties on employers.

Okay, before we talk about penalties though, can I ask you to comment on whether you think the agency will expand its investigation beyond a single complaint and consider whether other workers in that organisation have also been underpaid?

I'd say if it finds that an employee has been underpaid, it's likely to consider how many other members of staff has also been underpaid because it will be able to use its powers to examine payroll practises across an entire workforce.

Yeah, and of course that would create a different level of financial risk, wouldn't it, for the employer?

Yeah, absolutely. Let's say an employer is incorrectly excluded overtime from holiday pay calculations. Repaying one employee might not cost the employer very much, but if the inspector reviewing payroll records identifies A systematic error, that could impact hundreds of workers across, you know, the entire workforce potentially.

Yeah, yeah. The other thing I noticed was that if the agency starts looking at your holiday pay calculations, they might also decide to expand their investigation and look into other elements of your workers pay. So things like national minimum wage and statutory sick pay.

I can see that that's entirely possible. And that seems to be on the basis that if you've made a mistake about holiday pay, then you might be making other mistakes, which mean your staff aren't being paid correctly via other avenues as well.

Yeah, and that's a sobering thought, isn't it? Particularly as national minimum wage calculations can be even more difficult to apply than holiday pay ones.

They can, that national minimum wage, one of the most technical calculations we do because there are set reference periods, for example. So it's not about averages, it's about very specific particular calculations that we have to do. It's a very rigorous and rule driven. So yeah, not something you want to be on the radar for.

Yeah.

No, no, and certainly the stuff that comes across my desk is that some of the biggest problems seem to be in relation to salaried hours workers. Quite a lot of the contracts are not compliant. Yeah, so, oh dear. Okay, so let's focus then on what happens if the agency discovers you've not

Yeah.

paid your staff correctly. What's the process they're going to follow to recover the money for affected workers?

To start off with, the government says that they'll provide opportunities for employers to correct any other payments rather than moving straight to punitive enforcement action and that is literally taken from the government, that's their quote.

Okay, so what does it mean?

So it will explain why it thinks that the employer has got the calculations wrong and it will invite them to repay all affected staff.

Okay, so carrot and stick, but let's look at the stick then. If it doesn't, if the employer doesn't pay all of the staff having been shown the error of their ways, what then happens?

Yeah.

then it will issue a notice of underpayment in the same way that it does for national minimum wage breaches. Now that notice will set out the difference between what an employer has paid a worker and the amount that they should have paid them and then that money will go to the worker. It can also then issue penalties. The government's favoured

Option mirrors the penalty scheme that applies to national minimum wage breaches.

So could you explain how much could be payable by way of penalties then, Elaine?

Yeah, and these are quite big numbers. So it can be a penalty of 200% of arrears per worker, which can be reduced to 100% if those monies are paid within 14 days. I thought the same, yeah, exactly. A maximum penalty of 20,000 pounds per worker,

A bit like a parking fine.

but that's only payable where there has been a sustained period of underpayment and a minimum penalty of 100 pounds per case, which could include multiple workers, which acts as a deterrent against making small underpayments.

Interesting. And an employer will only be able to challenge this by bringing a claim in an employment tribunal, because by that stage, it's too late to whinge to the agency direct, isn't it?

That's right. And it's actually the only time I can think of where an employer starts a claim in the tribunal.

Yeah, yeah.

How far back will an agency be able to look and ultimately enforce underpaid holiday?

The agency will only be able to enforce underpayments during the claim period and the government believes that this should be 6 years to match that for national minimum wage underpayments to avoid confusion. It's one of the things that it's currently consulting on but, and it is a big but, it will only be able to enforce claims

from the 18th of December 2025, because that's the date that the Employment Rights Act 25 came into force, even if the non or underpayment started earlier than that. Now, the consultation seems to suggest that if the situation arose before the 18th of December 2025, but continued beyond that date,

the agency would not enforce any parts of the workers claim. If that's correct, it's going to disadvantage many workers who have been underpaid for years but remain working for the same employer.

Yeah, I saw that and I think it's very odd. I mean, clearly there needs to be a cut-off date, but I don't understand why the agency can't just ignore everything that occurred before the 18th of December 2025 and concentrate on what has happened since.

Yeah, hopefully it will clarify this point once it's published, the response to the consultation. So we're just going to have to wait and see on that point.

The other thing I noticed was that in addition to restricting claims to six years, the government is considering imposing a financial cap on how much a worker can actually recover. Why do you think it's looking at that?

I think that's because it wants the agency to focus on enforcing the rights of lower paid workers because, and to go back to where we started this discussion, it believes they are more likely to have their rights infringed and are less likely to have the means to pursue holiday play games via the tribunal. So in other words, it doesn't want the agency getting bogged down sorting out the holiday pay

Of highly paid workers who've got other ways to fight for their rights.

The Employment Rights Act doesn't mention a cap, does it?

No, it doesn't. So if the government decides to impose a cap, it will have to do so via separate regulations.

And the government hasn't said what the cap will be.

No, but it has said that it will need to be high enough so that low paid workers would still be able to recover all of their arrears.

going back potentially 6 years, so it's probably going to have to be relatively high.

Yeah.

I think so, yeah.

Do we know when the agency will start enforcing holiday pay underpayments?

We don't have a precise date, but it will be next year.

Okay. And do you think, and this is a very loaded question here, Elaine.

Yeah.

Do you think employers should wait until the Fair Work Agency starts enforcement before reviewing their arrangements?

I think everybody listening knows what I'm going to say to this, but no, I wouldn't recommend it. So the agency may not have these powers immediately, but the direction of travel is really very clear and the government has repeatedly said that it wants a stronger enforcement framework for workplace rights. The employers who will be in the strongest position are those that review their holiday

pay arrangements now are identifying any issues and making corrections before a regulator even becomes involved.

Okay, so what practical steps should employers take then?

Mhm.

Second, cheque how holiday pay is being calculated in practise rather than assuming your payroll systems are correct. We tend to get out paper and pen and do a few manual calculations just to make sure whenever we're helping clients in this situation. And obviously you will need to think about overtime, allowances, commission and other similar payments that may need to be reflected.

in holiday pay. And #3, finally, make sure you can explain how you've reached your calculations because you do need to retain records for six years.

So in other words, don't wait until an inspector starts asking questions before finding out how your organisation actually does calculate holiday pay.

Exactly. By then, you're on the back foot. So the time to review holiday pay compliance is now while you can do it in a controlled and planned way. And I would be remiss if I didn't mention, Jo, that we've obviously got a comprehensive guide to help anybody who's listening. Now, we do charge for this because it sets out everything that you need to do.

Yeah.

do need to know and need to do to get the calculations right. So if anybody is listening and thinking this is something that you need to tackle, please let Jo or me know if we can help or if you would like a copy.

Yeah, I must say that that took weeks to put together. It was it was a labour of love.

It's how you earn your, it's how you earn your guru status, Jo.

Yeah.

Okay, right. Before we go, Elaine, you mentioned that some employers are making mistakes in respect of bank holidays. Now, of course, there's no right for an employee to take bank holidays off under the working time regulations, which sometimes surprise people, I think. So can you expand on what you mean?

Yeah, I think the confusion stems from when the regulations were changed. So originally workers were only entitled to four weeks or 20 days leave if they worked full time. If the business closed during bank holidays, eight of those 20 days were deducted for their allowance, which left workers with only 12 days to play with, so just over 2 weeks.

We then got an additional 8 days, which brings the total up to 5.6 weeks. But workers can't automatically take these off during bank holidays unless their contract says they can, or they've asked to take these days off by making a request in the usual way. Now, the reason I mention this is that employers who

whose holiday years run from the 1st of April to the 31st of March may find that they aren't giving their staff 5.6 weeks leave in 2027 to 2028. And it really depends on how your contracts are worded because basically for 2026 and 2027,

there are 10 bank holidays and the following year only six. And that's because Easter falls twice in the 2026-2027 holiday year because it was April this year and it's going to be March next year. And I think lots of employers won't have realised that.

Yeah, yeah. I've never quite understood why employers have that as a date. I mean, we see in the education sector that quite often the holiday year mirrors the academic year, but something that deals with Easter is always going to be complicated.

What I would say, though, to our listeners is that we've written a blog about that, which examines the most common types of holiday clauses. It's on our website, but if you can't find it, again, please let us know and we can send you a copy. And I think we conclude by recommending that if you have a holiday year from April to March, you think about changing it.

unless you've got a really good reason not to. And that's because the date Easter falls changes every year because it's linked to the first Sunday after the first full moon that falls on or after the 21st of March. Now, I don't know what your views are, Elaine, but holiday is complicated enough.

without having to deal with moving bank holiday dates in my view.

Yeah, we do see it from time to time. I won't say all the time. I'd say the most common holiday we see is January to December, but there are still some that do that April to March though, and I agree it's a difficulty to have to deal with.

I think that where, my understanding anyway, is that where a holiday year runs from April to March, it's usually because the employer is busy over the Christmas period and wants to avoid staff taking too much time off during their busiest periods, simply because they don't have holiday to take.

But that could be avoided by choosing a different date. It could be, for example, February to January, couldn't it?

It could or if you are January to December, I think it's about communications through the year to make sure that people aren't stockpiling a holiday to use at the end of the year and on a quarterly basis, reminding them they've got to take it. So sometimes robust communications work too.

Yeah, okay. Well, I think we'll finish on that bombshell then, Elaine.

I know, a tricky one to go through today, but hopefully everybody has found this really useful and we are here to help and we have got resources to help you. So please don't forget that the best way to find out what's happening in the future is to sign up to receive our monthly newsletters and updates and the quickest way to do that

is to get in touch with either me or Jo. You can find us on the Irwin Mitchell website which is www..irwinmitchell.com and we're also both on LinkedIn.

Great, thank you. That just leaves me to say thank you to our listeners. You're a loyal bunch and we appreciate it. Please tune in next month for more insights and if there's anything employment law related you'd like Elaine and I to cover, please let us know. Bye bye.

Bye bye.

We came in just about on time.

We did.

Patrick Wilkins stopped transcription