The Government has reformed holiday pay rules to allow many temporary workers to receive ‘rolled up’ holiday pay – reducing the chances of providers retaining unclaimed (accrued) holiday funds.
Rolled-up holiday pay is now permitted for irregular hours and part-year workers. For many umbrella contractors, this means holiday pay can be paid alongside regular income, rather than held back and potentially left unclaimed.
If you’re working via an umbrella company, it’s worth understanding how umbrella companies work and how holiday pay is handled in practice.
What is ‘rolled up’ holiday pay?
If you’re an umbrella company contractor, you will typically receive holiday pay via one of two methods:
1. Accrual method
Your umbrella company keeps your holiday pay aside until you take time off, or cease working on an assignment.
The trouble with this method is that if you don’t claim your holiday during the tax year, you may lose your entitlement to it, and the umbrella retains the funds.
Some providers have been known to take advantage of this, and not remind employees to claim what is owed.
2. Rolled up method
If your umbrella uses the rolled up (advanced) holiday pay method, then its employees are paid their holiday pay entitlement alongside their regular pay – every week or month.
So, holiday pay is not accrued. This reduces the risk of so-called ‘salary skimming’ by bad providers.
Although this method of pay was previously considered unlawful following a European Court decision in 2006, it is now permitted under updated UK rules for irregular hours and part-year workers.
What changes were introduced?
The legislation, which came into effect on 1st January 2024, followed a consultation into how annual leave entitlement is calculated for part-time and irregular workers.
The change was initiated following a Supreme Court decision in the Harpur Trust vs. Brazel case which gave part-year workers a more generous leave entitlement than part-timers who work the same amount of hours across the year.
From 1st January 2024, employers have the option to offer rolled-up holiday pay for eligible workers. The amount is typically based on the standard 12.07% uplift – paid at the same time as ‘normal’ pay, rather than when the worker takes annual leave.
In practice, this means contractors receive holiday pay as part of their regular income, rather than needing to claim it separately.
How will the change affect umbrella company contractors?
We asked Lucy Smith, director of Clarity Umbrella, how making rolled up holiday pay lawful will impact contractors who are working via umbrella companies:
The news on rolled up holiday pay becoming lawful will be a welcome update to both umbrella companies and contractors alike.
For those contractors who were used to working via their Ltd companies, the idea of withholding monies for when they are not working, just seemed like an unnecessary evil. It also led to some contractors losing money when unused accrued holiday was swallowed up by some companies.
Applying this to irregular hours workers and part-year workers should almost certainly be argued that umbrella workers fall within scope as they have no assignment guarantees of work and breaks between assignments.
For a comparison of working models, see our guide to limited vs umbrella.
Further reading
- What is holiday pay and how is it calculated?
- Are the deductions on your umbrella payslip legitimate?
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