The Government has announced a reform of holiday pay rules which will allow many temporary workers to receive ‘rolled up’ holiday pay – reducing the chances of unscrupulous providers pocketing unclaimed (accrued) holiday funds.
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 keeps the cash.
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 minimises the chances of so-called ‘salary skimming’ by bad providers.
Although this method of pay is widely used by umbrella companies, it is actually unlawful following a decision by the European Court in 2006 which stated that the practice breached the Working Time Regulations.
What changes are due to be made?
The draft legislation, which is due to take effect in January 2024 follows a consultation into how annual leave entitlement is calculated for part-time and irregular workers.
The proposed 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 house across the year.
From 1st January 2024, employers will have the right to allow rolled-up holiday pay for certain workers. The amount is based on the standard 12.07% rate – paid at the same time as ‘normal’ pay, rather than when the worker goes on annual leave.
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 the umbrella workers fall within scope as they have no assignment guarantees of work and breaks between assignments.
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