Charlie Barnes says schools should review their holiday pay processes and offers guidance for employees earning the National Minimum Wage

The government recently published its response following a consultation on proposals to simplify holiday pay and entitlement, with new legislation which was introduced at the beginning of this year. This should come as welcome news to schools as it will provide clarity over the calculation of holiday pay for irregular hours workers, including visiting music teachers, sports coaches and exam invigilators.

The new legislation also makes clear how holiday pay must be calculated for those workers who earn a basic salary plus other pay elements, such as paid overtime or ‘on call’ payments related to their status.

With the Supreme Court recently confirming that holiday pay liabilities can go back two years, schools must plan carefully for these changes to mitigate the risk of errors.

Accrual to return 

For casual workers, most employers took the view that holiday accrued in proportion to the number of hours worked. This meant that for every hour worked, the worker accrued 12.07% hours of holiday, being the percentage of statutory holiday (28 days) workers are entitled to, based on the number of working days in a year.

However, the 2022 Supreme Court decision in Harpur Trust v Brazel judged this method of calculation to be unlawful, determining that holiday accrues based on length of service, not the amount of time worked. This resulted in workers who have gaps of more than a week between work being entitled to more holiday and therefore more holiday pay – effectively meaning that any employer using the 12.07% method of calculation may underpay a worker’s holiday pay.

In a welcome step for affected employers, the government intends to reverse the effect of this judgment and has proposed legislating for a 12.07% calculation for irregular hours workers. This will simplify the payroll process for calculating holiday pay and will reduce holiday pay costs that arise from the Harpur Trust decision.

However, this amended basis of calculation only takes effect for annual leave years commencing on or after 1 April 2024. Until then, employers must still calculate annual leave entitlement and pay for irregular hour workers according to the principles set out in the Harpur Trust case.

Regularly paid overtime must be included

The current holiday pay legislation states that where workers earn a salary, they are entitled to their ‘normal remuneration’ when they take holiday. Many employers typically only paid basic salary when workers took holiday, but this led to a raft of claims that normal remuneration also meant other payments such as commission, overtime payments and allowances. Most of these claims were successful, leading to employers having to review their holiday pay calculations.

The new holiday pay law clarifies what constitutes normal remuneration by bringing these case law decisions into the legislative wording. So, this isn’t really a change, but rather a confirmation of what the law already is. But it does mean it is now clearer what an employer must do when calculating holiday pay for workers who earn additional pay on top of their basic salary.

Unfortunately, there are still some aspects of holiday pay entitlement that have not been clarified, such as what represents ‘regularly’ paid overtime. The previous case law on this point may now have little relevance given the effect of the Retained EU Law (Revocation and Reform) Act 2023, so employers will need to consider carefully their approach to calculating holiday pay to avoid the risk of non-compliance with the new legislation and possible litigation.

National Minimum Wage increase

From 1 April 2024, the highest rate of the National Minimum Wage (NMW), the National Living Wage, increased from £10.42 to £11.44. This applies to all workers aged 21 and over.

Pay compression

The increases may inadvertently create workforce tension when schools, unable to afford generous wage increases across the board, are providing less for those earning slightly above the NMW. Some have coined the term ‘pay compression’ which is creating challenges for line managers in schools who will have to tackle these conversations at pay review time and when analysing their benchmarking processes. School leaders may therefore need to get inventive with how they can continue to incentivise this group of workers where there’s no further room for pay increases. 

Compliance risks

The significant increase in NMW also increases the exposure to the risks of non-compliance. The penalties for non-compliance are severe – repayment of all underpayments going back six years, a 200% fine, and reputational harm from naming and shaming. The size of the increase may, for the first time, impact employers which had not considered themselves at risk of NMW breaches and they will need to understand the essential elements of NMW compliance outlined below.

Worker categorisation

The starting point for NMW compliance is to categorise workers correctly based on the work they are doing, as there are different rules which apply to each. An employer could inadvertently breach NMW by getting this wrong. There are four categories of work – salaried, time, unmeasured and piece rate. Employers commonly make a mistake by assuming that workers paid a salary are performing salaried work. However, there are certain contractual conditions which must be met for the worker to be performing salaried work. If any of those is not met, the worker will probably be performing unmeasured work.

Salary sacrifice

For employers, salary sacrifice schemes still cause compliance headaches, as they must consider the post-salary sacrifice pay for NMW compliance purposes. If an employer operates a pension salary sacrifice scheme which meets the basic auto-enrolment requirements (total 8% employer pension contribution), the employee’s gross pay before salary sacrifice must be at least £24,600 assuming a 40-hour working week. The eligibility for the salary sacrifice scheme will need to be considered for NMW purposes before workers are enrolled. It’s important to note though that the worker must still be automatically enrolled into a qualifying pension scheme.

Working time

Working time continues to be a challenge when complying with NMW. It is the time the worker actually spends working which must be considered. Employers need to understand what amounts to working time so that it can be captured accurately. For example, the time it takes to get changed into a uniform or time spent training could be considered as working time. Employers also need to implement a time and attendance system which records when the worker is working.

This is not an exhaustive list but a starting point for those who have never considered NMW compliance before. There are many other NMW risks which employers need to be aware of. These significant rate rises mean a NMW audit should now become a priority to avoid the significant penalties which can arise.

Charlie Barnes is head of employment legal at accountancy firm RSM.

Charlie Barne