Holiday pay enforcement: the direction of travel
Holiday pay is notoriously complicated and this is an area rife with accidental non-compliance by the most well-intentioned of employers. Up until now, it has been up to individual workers to enforce holiday pay claims in the Employment Tribunal. While this has resulted in isolated high-profile cases, the complexities around holiday pay mean that non-compliance around more technical points often goes unchallenged. This is likely to change.
The Employment Rights Act 2025 (the Act) will add a state enforcement mechanism alongside the individual claims route, with holiday pay enforcement to come within the remit of the new Fair Work Agency (FWA) from 2027. The involvement of a specialist enforcement body may increase the practical risk of holiday pay arrangements being challenged and, where there is a challenge, an employer’s financial exposure will be significantly increased, with liabilities extending to underpayments in relation to whole classes of workers (rather than individual claimants), and the prospect of additional civil penalties. The move toward state enforcement is therefore a significant one, and employers with any complexity in their pay arrangements should treat this is as material risk area, monitor developments with care and take steps to prepare.
The consultation
The Act sets out a default framework for holiday pay enforcement, but provides flexibility for regulations to support divergence from this default approach where appropriate. The government has now published a consultation setting out the proposed enforcement approach in relation to holiday pay. In headline terms, businesses may take some comfort that the approach promises (at least initially) to be more supportive and less punitive than the enforcement of National Minimum Wage on which it is modelled. However, the risks attached to non-compliance will nonetheless increase considerably.
The FWA enforcement mechanism in outline
The FWA holiday pay enforcement mechanism is expected to mirror the existing enforcement of National Minimum Wage. Where the FWA investigates an employer and finds that holiday pay has been underpaid, it may order payment of arrears to affected workers. Additionally, it may impose a civil penalty of 200% of the arrears (subject to a minimum of £100 and a maximum of £20,000 per worker). Where all arrears and half of the civil penalty (so 100% of arrears) are paid within 14 days, the civil penalty is treated as discharged. The FWA can investigate underpayments going back up to six years, though – importantly – it will not be able to address underpayments before 18 December 2025 (the date the Act received Royal Assent).
The government is also consulting on expanding the ‘naming and shaming’ scheme, familiar from the National Minimum Wage context, to cover holiday pay non-compliance. However, this would be a measure the government would look to introduce in the future and we do not expect the naming scheme to operate from the outset.
Proposed enforcement approach
Acknowledging the complexities around holiday pay, the indication is that the FWA will work with businesses to support and encourage compliance before moving to enforcement action. In most cases, an employer could therefore expect to receive a ‘nudge’ from the FWA in relation to any concerns about holiday pay compliance. Provided an employer responds quickly, corrects any non-compliance and voluntarily pays out any arrears owed, the organisation would not ordinarily face a civil penalty in this scenario.
Implications for your business
The proposed enforcement approach largely follows the model we expected to see. There are two elements of the proposals from which employers can take some comfort: first, the stated intention to take a supportive approach and give employers the opportunity to rectify errors and pay out arrears to avoid a civil penalty, and secondly (and perhaps more importantly) the FWA’s inability to apply a look-back beyond 18 December 2025. Together, these measures will limit exposure in the early stages of enforcement action.
However, it would be a mistake to deprioritise the issue as a result. The further we move away from 18 December 2025, the higher a potential arrears bill becomes and, while the FWA’s proposed ‘nudge’ approach will allow businesses to avoid civil penalties, the requirement to voluntarily pay out all arrears owed means that businesses may still face significant financial liabilities.
What you can do to prepare
Holiday pay can be very complex and difficult to manage correctly in practice where a business engages workers on irregular hours arrangements, or where pay is made up of multiple variable components (and not simply a regular basic salary). If there is any complexity in your pay or working arrangements, we strongly recommend that you take the opportunity now, before the FWA’s enforcement powers commence, to audit your holiday pay arrangements. If that audit reveals any issues, it would be prudent to take remedial action now, though a note of caution is appropriate here: it is not unusual for issues to crystallise at the point at which an employer tries to address them. Any measures taken to address non-compliance in this area, together with the associated employee communications, should be handled thoughtfully to avoid triggering disputes or causing unnecessary disruption to your business.
How we can help
We advise businesses of all sizes and across a range of sectors on complex holiday pay arrangements. We can give you a clear risk assessment and, if necessary, support you through any remedial steps. Our practical, commercial approach helps clients manage risk in this area while minimising business disruption.
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