Why a review of EU laws and a landmark ruling makes it the perfect time to reform holiday pay

By Joshua Toovey , Senior Research and Policy Officer, IPSE

Since the 2017 and 2021 IR35 reforms were introduced, contractors have been increasingly operating via umbrella companies. Consequently, the holiday pay arrangements of these new ways of working have come under greater scrutiny by contractors.

Over the past year, we’ve had two significant developments concerning holiday pay for contractors and as a result, government has been forced to re-think the current regulations that govern holiday pay.

Below, we summarise the proposals set out by government as part of a review into EU laws and outline why a landmark ruling in 2022 has brought about the need for reform to the way holiday pay is calculated.

Review of EU law provides opportunity for reform

The UK government is planning on passing the retained EU Law bill before the end of 2023, selecting which current EU law to revoke or amend going forward. At IPSE, we’re particularly interested in how government intends to legislate on EU employment law and how it could potentially provide clarity on holiday pay for contractors currently operating through an umbrella company.

Over the past two years, IPSE has heard reports of contractors not receiving their holiday pay after failing to claim their entitlement before it expires – with questions over whether their umbrella company did enough to warn them of this.

We were therefore pleased to see that government has now pledged to reform current EU employment law when it comes to administering holiday pay and has instead now proposed the introduction of rolled-up holiday pay.

What is rolled-up holiday pay and why could it bring clarity to umbrella company workers?

Holiday pay is referred to as ‘rolled up’ when the employer pays a worker’s holiday pay as an additional amount on top of their hourly rate throughout the year. In the case of contractors operating through an umbrella company, this would simply be added as an additional amount and included on the payslip.

Unlike traditional employees, this means that the worker will not be paid during periods of leave, but it does ensure that the funds earmarked to fund their rest period – their holiday pay – are passed on to them.

We believe that the move to introduce rolled-up holiday pay will provide greater certainty to part-time, part-year, agency and umbrella company workers as these workers will know that they are receiving their due holiday entitlement. It should also ensure that they have greater control over their holiday arrangements and won’t be in fear of missing a deadline to claim it.

It’s often easy to criticise government for failing to act or being too slow to deliver reform, but we should equally acknowledge when government proposes a sensible solution.

Government consulting on calculating holiday entitlement

Coinciding with the consultation on EU employment law and the government’s plans to reform the distribution of holiday pay, government is also now consulting on how holiday pay should be calculated for part-time and part-year workers. This follows a landmark judgement in the 2022 case of Harpur Trust v Brazel.

The case centred on the calculation of holiday entitlement for part-year workers and threw up an interesting discrepancy with the way that holiday pay is calculated for part-year and part-time workers.

In this instance, it was deemed that the current Working Time Regulations of 1998 fail to include a pro-rate principle for part-year workers. The ruling means that part-year workers are entitled to the same holiday pay as those working full-year and ultimately the judgement threw out the old 12.07% method that was widely adopted by employers (including many umbrella companies) for calculating holiday pay.

For more information on the Harpur Trust v Brazel case, we’ve put together a brief outline of the case and reviewed the potential significance on holiday pay in the sector.

Umbrella company consultation

As part of government’s plans to regulate the umbrella company market, as brought forward last month in a consultation document, holiday pay for umbrella company workers is one area under consideration when establishing minimum legislative requirements for umbrella companies to comply with.

Within the proposals, we were interested to see that umbrella companies could be required to pay the holiday pay owed to their workers, even if they have not been paid by the end-client.

Finally, don’t forget to take time off…

Taking time off when you work for yourself is notoriously difficult. In fact, IPSE research has revealed that the average freelancer takes four less days off than the entitlement of employee counterparts.

Similarly, we know that freelancers do not feel they are able to switch off entirely, with four out of five freelancers continuing to work while on holiday.

But it should be remembered that there is a business case for increasing your time off. Indeed, 63% of freelancers say taking time off improves their work performance whilst nine out of ten freelancers say taking time off has at least some positive effect on them.

So don’t forget to take some holiday in these summer months...

For an in-depth look at IPSE’s research into this area, you can read our latest research here.

Similarly, we’ve also put together an advice section on mental wellbeing for the self-employed and on how to tackle freelance burnout.