What is the change?
From April 2027, The Fair Work Agency (“FWA”), an Executive Agency of the Department for Business & Trade, will be enforcing workers’ rights to statutory holiday pay. The FWA’s role is to enforce a wide range of labour market legislation and protecting workers from exploitation, non-compliance and abuse. It has responsibility for upholding compliance with employment agency rules and the minimum wage, licensing of gangmasters, and acting against serious labour exploitation.
A consultation has been issued which highlights the FWA’s role in holiday pay enforcement and the future direction of activity in this area.
Why is this new enforcement being introduced?
Calculating holiday pay can be complicated and HMRC has set out in the consultation that whilst no single data source fully measures holiday pay compliance, the evidence available indicates a significant level of non-compliance.
The FWA’s powers to uphold compliance with holiday pay law and to take enforcement action on behalf of workers will be a new way of enforcing holiday pay where the state will take action to ensure that employers are complying with the law and, where necessary, to recover arrears for workers.
State enforcement can be more efficient than taking an individual claim to a tribunal and so will enable more workers to have their right to the correct amount of holiday pay enforced more quickly. Workers will not have to pay to have their rights enforced by the FWA.
State enforcement is also able to reach more workers and businesses than individual enforcement. FWA enforcement activity assesses compliance for the entire workforce of a business, not just single workers. It can therefore place legal obligations against breaches on the entirety of each business.
What does the consultation say?
The consultation document seeks views from interested parties on three core areas:
- the proposed approach to holiday pay compliance and enforcement;
- some of the important design features; and
- what support and guidance the Fair Work Agency can provide to help support compliance.
As well as highlighting the support intended to help employers with voluntary compliance, the consultation includes several government proposals which draw parallels to the current enforcement regime for NMW.
This includes:
- the introduction of penalties calculated at 200% of the underpayment (but reduced to 100% if paid with 14 days),
- historical liability being calculated over a period of six years, and
- those who make errors being named publicly.
Next steps
Holiday pay compliance is an area that many employers can inadvertently fall foul of. We have seen, for some years now, the approach taken in respect of NMW compliance, which can be very detailed and as well as a lot of data being reviewed, workers are often interviewed. A large number of NMW underpayments are due to inadvertent errors because of the complexity of the legislation rather than a deliberate attempt to underpay.
The indications are that from April 2027 the approach taken on holiday pay compliance will largely mirror this. It is important, therefore, that employers look critically at how holiday pay is calculated now and take action to update systems and processes.
Where holiday pay has been underpaid there is the opportunity to put this right before the FWA start any compliance activity.
How can UNW help?
UNW has experience in helping employers comply with the payment of holiday pay to employees.
If you are unsure whether your current holiday pay arrangements would stand up to scrutiny, UNW’s employment tax team can carry out a targeted holiday pay compliance review and provide practical recommendations to help you manage risk and prepare for the FWA’s increased enforcement focus.
Specifically, we can help employers with the following:
- undertake a holiday pay compliance review;
- map worker populations and identify higher risk groups;
- review payroll data and calculation methodologies;
- quantify historic exposure;
- support remediation planning;
- review contracts, policies and employee communications;
- prepare for FWA scrutiny; and
- provide training for HR, payroll and finance teams.
If you would like to discuss how we can help you, or have any other employment taxes related queries, please get in touch with us at employmenttaxesteam@unw.co.uk
