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Contractor holiday pay: does it have to be this complicated?

Why does holiday pay for temps and contractors have to be so complicated? Photo by anna-m. w via Pexels
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Government’s holiday pay consultation “step in the right direction” but confusion likely to remain, say umbrella company experts

A government consultation on how holiday pay entitlement should be calculated for temporary, part-year and zero-hours workers, has opened and will run between 12 January to 9 March. The consultation was spurred on by a Supreme Court judgment in July 2022 in the landmark Harpur Trust v Brazel case. 

The case ruled that part-time music teacher, Ms Brazel, must have her holiday pay calculated on the same basis as a full-time employee – a decision which has had significant implications for businesses employing the various categories of temporary workers, including term time, seasonal and umbrella employees. 

The judgment resulted in complications in how holiday pay should now be calculated and some temporary workers will receive significantly more holiday pay than full-time workers. The government has quickly appreciated the difficulties and imbalance and seeks to correct them.

Although changes to UK holiday laws will be required to achieve it, the government’s proposals will reverse the consequences of the judgment, to use the very same method that has been in common (but apparently unlawful) use for many years.

The previous 12.07% was the statutory minimum period of holidays in a year (5.6 weeks), expressed as a percentage of the number of working weeks in a year (46.4 weeks). The idea is that this percentage figure gives a shorthand for the total value of holiday pay on an annual basis.

However, the 12.07% previously used meant that holiday was directly related to the amount of time someone works.  It enabled holiday to be pro-rated right down to the number of hours worked.  The Harpur Trust judgement means that holiday cannot be pro-rated down any further than 1 year. 

So, if someone has been on a temporary contract for 12 months but only worked 2 weeks, they are still entitled to 5.6 weeks paid holiday.  When you look at that as a proportion of time worked, it is going to be much more than compared to a permanent employee who will have worked 45 weeks in a year.  

While the case may not change the law, it clarifies how it is interpreted. 

Recruitment and umbrella sectors have since been struggling with the practical implications.

“Margins won’t be sufficient to cover it,” one source told The Freelance Informer.

What happens to accrued rights if agencies don’t play fair?

From IWORK’s perspective, this is a worrying development because temp workers would be losing accrued rights if they’re P45’d early just to avoid holiday pay liability. 

Temps do not want to receive more holidays than permanent staff, they just want equity.  In most cases they aren’t aware they should be receiving anything at all.

Fred Dures, founder of specialist payroll auditor, PayePass, commented:

“With little praise at the moment for the government and certain departments that have wholly failed to address the many and very serious issues that plague the temporary workforce sector, this consultation is welcome – as the proposed changes will be, if they are swiftly enacted. Implementing the proposals would ensure consistency across the board for all workers. It would make life a lot easier for everyone involved.

“However, an opportunity to sort out the mess, confusion and even immoral practices that still plague holiday pay and entitlement in the temporary workforce sector has been missed. Adding issues highlighted by the Court of Appeal in Smith V Pimlico Plumbers and those under consideration by the Supreme Court in Chief Constable of Northern Ireland v Agnew could finally resolve the problems that this sector has been crying out for.”

Julia Kermode of IWORK (pictured) questions why the consultation is not exploring the issue of rolled-up holiday pay, which is when a temp receives holiday pay as part of their wages rather than being paid when they take time off.

Kermode admits the consultation is an “important step in the right direction,” but other concerns are not being addressed.

“Bringing in these changes will simplify holiday pay for employers and make it much easier for temps to work out how much they’re entitled to and – crucially – claim it. As it stands, many temps don’t even realise they’re entitled to holiday pay. It means tens, potentially even hundreds of millions of pounds, are going unclaimed every year,” says Kermode.

However, Kermode questions why the consultation is not exploring the issue of rolled-up holiday pay, which is when a temp receives holiday pay as part of their wages rather than being paid when they take time off.

Kermode describes rolled-up holiday pay as a “hot potato” as it “contradicts the purpose of working time regulations which is being paid whilst taking a break.”

“That said,” she says, “rolled-up holiday pay does ensure that temps receive what’s legally theirs. Giving people an informed choice is what’s important here. Temps are already precarious enough without risking losing holiday, so should be empowered to ensure that they do actually receive it.”

If you are concerned about your holiday pay, please write to The Freelance Informer tax clinic at editor@freelanceinformer.com

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