Holiday pay has long been a complex area of employment law, particularly for employers with staff whose earnings fluctuate due to overtime, commission, bonuses, or irregular working patterns. With the UK Government signalling a stronger enforcement approach, businesses should take this opportunity to review their holiday pay processes and ensure they are fully compliant with current requirements.
The Government is currently consulting on proposals that would give the forthcoming Fair Work Agency powers to enforce statutory holiday pay rights from 2027. If the proposals are implemented, the new framework would enable the agency to promote compliance, investigate potential breaches and recover unpaid statutory holiday pay on behalf of workers.
While the proposals are still under consultation, the direction of travel is clear. Employers can expect increased scrutiny of holiday pay practices and greater accountability for getting calculations right.
Why Holiday Pay Calculations Matter
For many organisations, holiday pay is not as straightforward as paying an employee their standard salary while on leave. Where workers regularly earn overtime, commission and certain other regular payments, employers may be required to reflect those earnings when calculating holiday pay.
This is where challenges often arise. Inaccurate calculations can lead to underpayments, employee grievances, and potential legal claims. As enforcement measures become more robust, mistakes that may previously have gone unnoticed could result in financial and reputational consequences. Businesses operating in sectors with seasonal demand, shift work, sales incentives, or flexible working arrangements should be particularly mindful of their obligations.
New Record-Keeping Requirements
Alongside the increased focus on enforcement, employers should also be aware of important record-keeping obligations.
Since 6 April 2026, employers have been legally required to retain holiday and holiday pay records for six years. These records should clearly demonstrate how holiday pay has been calculated and administered. Key documentation includes:
- Details of holiday taken
- Holiday pay calculations
- Records of holiday carried forward
- Payments made in lieu of holiday
- Details of earnings included in holiday pay calculations, such as overtime, commission and other relevant payments.
Comprehensive records not only support compliance but can also provide vital evidence if an employer’s holiday pay practices are ever challenged.
Preparing for Increased Enforcement
The introduction of the Fair Work Agency could represent one of the most significant developments in employment rights enforcement in recent years. Although the agency’s powers have not yet been finalised, employers should avoid taking a wait-and-see approach.
Instead, organisations should take proactive steps to assess whether their current systems, payroll processes, and record-keeping practices align with legal requirements. This may include reviewing how holiday pay is calculated, confirming which earnings elements are included, and ensuring records are maintained accurately and consistently.
For businesses with complex workforce arrangements, obtaining specialist advice can help identify potential risks before they become costly issues.
Holiday pay compliance is no longer simply an administrative exercise. With stronger enforcement measures on the horizon and enhanced record-keeping requirements already in force, employers should ensure their processes stand up to scrutiny.
A review now can help reduce risk, improve confidence in payroll procedures, and ensure your organisation is well prepared for future regulatory changes.
At Prager Metis, we work with businesses across a range of sectors to navigate evolving employment and payroll obligations. If you would like to discuss your holiday pay processes or assess your organisation’s compliance position, our team is here to help.
