In brief
The government is consulting on the proposed approach of the new Fair Work Agency (FWA) to enforcement of statutory holiday pay entitlement.
Holiday pay has long been a complex issue for UK employers, often leading to lengthy and complex litigation for large employee populations. Conversely, litigation by individual employees is relatively rare. From 2027, statutory holiday pay rights will also be subject to state enforcement through the FWA, reflecting a significant shift in the compliance and risk landscape for employers.
Background
The FWA was established by the Employment Rights Act 2025 ("Act") as part of the government's wider labour law reform programme. It brings together labour market enforcement functions previously carried out by several state bodies, including HMRC in relation to the national minimum wage, the Employment Agency Standards Inspectorate and the Gangmasters and Labour Abuse Authority.
From 2027, the FWA will be responsible for enforcing statutory holiday pay compliance. The government has said that this regime is intended to complement, not replace, the employment tribunal system by providing an accessible, timely and effective route to resolution. It is consulting on how that enforcement regime should operate, with responses due by 22 September 2026.
Since 6 April 2026 an employer has been required to keep "adequate" records for six years to show whether it has complied with holiday and holiday pay entitlement. Breach of the record keeping requirement already carries criminal sanctions and accurate records will also be critical in evidencing to the FWA compliance with statutory holiday pay rights.
In more detail
Consultation proposals
The key proposals that are subject to consultation include the following:
- The FWA will only enforce statutory holiday pay entitlements. Disputes regarding additional contractual entitlements will continue to be heard by the courts or employment tribunals.
- The FWA's primary focus would be to support employer compliance with statutory holiday pay requirements. Its approach would range from publishing guidance, tools and calculators and encouraging voluntary reviews and payment of arrears, to more draconian measures in appropriate cases including investigating underpayments, ordering arrears to be paid and imposing financial penalties.
- The claim period for FWA enforcement of workers' holiday pay rights will be six years, although only in respect of instances of non-compliance that occurred after 18 December 2025 (the date the Act received Royal Assent).
- Where it applies, the penalty regime would be that already set out in the Act which mirrors the penalty regime for the national minimum wage – double the arrears due to the worker subject to a cap of GBP 20,000 and a minimum of GBP 100 per worker with a 50% discount applied where the required remedial action is taken within two weeks.
- Enforcement action could potentially be focused on lower-income workers and workers in more vulnerable or precarious employment. The consultation envisages that this could be achieved through setting a cap on the maximum arrears a worker could receive from FWA enforcement, triaging complaints to focus compliance and enforcement activity on lower-paid workers or targeting compliance and enforcement activity by geographical area (i.e., where there are higher concentrations of workers in more vulnerable or precarious employment).
The consultation also seeks views on how rolled up holiday pay for irregular and part-year workers is working in practice. The ability to use rolled up holiday pay for such workers as an identifiable uplift to pay throughout the year was introduced in 2024.
Comment
Statutory holiday pay compliance can be complex, particularly for workers with variable pay, irregular hours, commission, overtime or changing work patterns. There remain a number of complex questions regarding how holiday pay should be calculated which have yet to be determined by the courts. Although the FWA is expected to support employers in achieving compliance, its proposed enforcement powers - potentially taking a "whole employer approach" - may materially increase employer risk on a number of fronts. Much will depend on the level of clarity provided by the anticipated FWA guidance.
The shift from individual tribunal claims to potential proactive state scrutiny across groups of workers and over a longer period in respect of which claims could be made could expose employers to significant holiday pay liabilities, even before penalties are imposed. Systemic underpayment findings could also lead to broader investigation into other areas of compliance and create reputational exposure, attracting scrutiny from workers, unions, regulators and the press.
Practical steps
- Employers should already be maintaining adequate records in line with the new record keeping requirements introduced in April 2026. These will need to reflect the distinction between different types of statutory (and contractual) leave that has been taken or carried forward and the applicable rates of remuneration for each period of leave, bearing in mind that, under the proposals, the FWA would be looking only at statutory holiday pay compliance.
- Look out for guidance and tools published by the FWA and check that approaches to calculations and records align with these.
- Consider auditing current holiday pay practices before the FWA powers come into effect (including whether this could be carried out under privilege). Where underpayments or record-keeping gaps are identified, consider whether corrective payments, process changes or communications may be required. The consultation paper notes that the FWA would not normally issue a notice of underpayment (and penalty) if the employer has correctly repaid all arrears that are owed prior to the start of any investigation.
- Consider responding to the consultation. Employers with complex workforces or significant variable-pay populations may wish to feed into the consultation before it closes.
If you would like to discuss what the proposed measures set out in the consultation means for your business, please get in touch with your usual Baker McKenzie contact.