Planning for the change to four weeks annual holidays

From 1 April 2007 all employees will become eligible for a minimum of four weeks annual holiday on the date they next become entitled to annual holidays (their “anniversary date”).

Planning in advance for four weeks annual holidays

Employers need to plan ahead for how the introduction of four weeks annual holiday will impact on their businesses.

Employers will need to budget for their employees’ increased annual holiday entitlements as a future liability so as not to face unplanned full costs on or after 1 April 2007 . Practically, this means employers need to start budgeting for the increase from their employees’ anniversary dates after 1 April 2006 , being aware that the entitlements do not actually vest until 1 April 2007 .

The entitlement to four weeks annual holiday means, in practical terms, that employees have the right to a minimum of:

• four (rather than three) weeks holidays once employees reach their next anniversary date after 1 April 2007 , or
• holiday pay of 8% (rather than 6%) of the employees’ gross earnings since their last anniversary date (or for new employees - since starting work), if employees leave their job after 1 April 2007 and before their next anniversary date.

Key information employers will need to think about is how many employees are affected (that is, how many employees will move from three to four weeks annual holidays), and when their anniversary dates are (that is, when employers need to accrue at four rather than three weeks entitlement).

Employers will need to talk to their payroll providers or other advisors about options for managing this through their payroll system.

Payroll systems are often used to plan for future holiday entitlements and for forecasting potential holiday payments if employees leave their job. Most payroll systems look ahead to employees’ next annual holiday entitlement a year in advance, then gradually build it up on a proportional basis during the year leading up to that entitlement (often called “accrual”). Accrual systems currently based on a three week minimum annual holiday entitlement will not forecast any increased liability.

The Holidays Act 2003 does not impose an obligation on employers to provide an increased annual holiday entitlement until 1 April 2007 . If, however, employers do not have accruals or contingency planning in place, they will face the full costs of unbudgeted additional liability from 1 April 2007 .

Employees who already have four or more weeks holidays

The transition to four weeks annual holiday as a minimum entitlement does not mean that all employees who currently have four or more weeks annual holidays will qualify for extra holidays. Whether employees will receive an additional week above the new minimum requirement will depend on the specific wording of their employment agreement.

Agreements providing for a specified number of weeks’ annual holidays (for example, specifying “four weeks annual holidays”) would not provide any additional entitlement. Some agreements, however, use wording about providing one or more “additional” weeks’ holiday than the statutory entitlement. Such agreements have to be looked at carefully to determine whether the additional week or weeks applies on top of the new minimum entitlement. Employers who have such agreements should seek independent advice regarding interpretation.

Employers who provide above-minimum entitlements may choose to negotiate additional holiday arrangements with their employees.

Pay-as-you-go holiday pay after 1 April 2007

Employees may be paid on a pay-as-you-go basis in two circumstances only – where there is a genuine fixed term agreement of less than 12 months, and where employees’ work patterns are intermittent or irregular (genuine casual work) – for more information, see the fact sheet entitled: When pay-as-you-go provisions can be used.

For employees receiving annual holiday payments on a pay-as-you-go basis, their entitlement changes on 1 April 2007 to 8% of the employees’ gross earnings for each pay period.

What happens if an employee leaves their job before reaching their entitlement to four weeks holiday?

Before 1 April 2007 - An employee who leaves their job before 1 April 2007 and before their next anniversary date, will be entitled to the following:

• payment for any remaining annual holidays from previous anniversary dates at the greater of average or ordinary earnings; and
• payment at 6% of gross earnings for the period between their last anniversary date and their termination date.

An employee who leaves their job before 1 April 2007 who has not completed 12 months’ work is entitled to a payment of 6% of their gross earnings since starting work.

After 1 April 2007 - An employee who leaves their job after 1 April 2007 , and before their next anniversary date, will be entitled to the following:

• payment for any remaining annual holidays from previous anniversary dates at the greater of average or ordinary earnings; and
• payment at 8% of gross earnings for the period between their last anniversary date and their termination date.

An employee who leaves their job after 1 April 2007 who has not completed 12 months’ work is entitled to a payment of 8% of their gross earnings since starting work.

Examples of how the change to four weeks annual holidays will work in practice

Vested holidays: an employee becoming entitled to additional holidays

Sian’s anniversary of employment is 27 November, so on 27 November 2007 she will become entitled to:

• four weeks annual holiday. Sian will become entitled to a further four weeks annual holiday on each anniversary date after that.

No vested entitlements: an employee leaving his job before 1 April 2007

Ropata leaves his job on 2 March 2007 . His last anniversary (and vested entitlement to annual holidays) was on 1 February 2007 . Ropata is entitled to:

• payment for any annual holidays he has remaining (including the 3 weeks from 1 February 2007) at the greater of average or ordinary earnings; and
• payment at 6% of gross earnings for the one month period between 1 February and 2 March 2007 .

Vested termination payment: an employee leaving her job after 1 April 2007 and before her next anniversary of employment

Moana leaves her job on 1 August 2007 . Her anniversary of employment (and last vested entitlement to annual holidays) was 1 November 2006 . Moana is entitled to:

• payment for any holidays remaining of her 3-week entitlement from 1 November 2006 (and outstanding holidays from earlier holiday entitlements, if any) at the greater of average or ordinary earnings;
• payment at 8% of gross earnings for the nine month period between 1 November 2006 and 1 August 2007 .

Vested holiday entitlement: an employee leaving his job after his new four weeks annual leave entitlement has vested

Ted leaves his job on 12 May 2007 . His last anniversary (and vested entitlement to annual holidays) was 12 April 2007 . Ted is entitled to:

• payment for any holidays remaining of his 4-week entitlement on 12 April 2007 (and payment for any outstanding holidays from earlier 3-week entitlements, if any) at the greater of average or ordinary earnings; and
• payment at 8% of gross earnings for the one month period between 12 April and 12 May.

Definitions

Anniversary Date – means the anniversary of the date an employee started work (or a nominated date if the employer has an annual closedown), and is the date the employee receives their next full annual holiday entitlement.

Vested entitlement –means an entitlement that has been given over to an employee and which the employee is entitled to take in full.