Why employers should act before the Fair Work Agency arrives
For employers, holiday pay compliance can often seem like a technical payroll issue, important but rarely urgent unless an individual worker brings a claim. But from 2027, statutory holiday pay rights will fall within the enforcement remit of the Fair Work Agency, giving the state a direct role in identifying and pursuing underpayments against employers.
The practical effect for employers is that holiday pay risk will no longer depend only on worker awareness, appetite for litigation, or the likelihood of a tribunal claim. If the Agency identifies arrears, it will be able to require the employer to pay affected workers and impose a financial penalty payable to the government. For employers with large numbers of irregular-hours or part-year workers, historic arrangements that have never been closely tested could become a significant liability.
The record-keeping obligation is central to that employer risk. Since April 2026, employers have been required to keep holiday pay records for six years, adequate to demonstrate compliance with the Working Time Regulations 1998. In an inspection, those records are likely to be the starting point. An employer that cannot show how holiday entitlement accrued, what leave was taken, what pay was due, and how different categories of leave were treated may find it difficult to rebut an allegation of underpayment.
The penalty regime also changes the commercial calculation for employers. Where underpaid holiday pay is identified, the penalty can amount to 200% of the arrears due to each worker, subject to a minimum of £100 and a maximum of £20,000 per worker. Although a 50% discount may be available where the required remedial action is taken promptly, the exposure can still be substantial. What might previously have been viewed by an employer as a payroll correction could, across a sizeable workforce, become a much more serious enforcement issue.
SME employers should not assume that size will protect them from scrutiny; the Agency’s powers will not be limited to large employers. The key question for any employer will be whether statutory holiday pay has been calculated and recorded correctly. That includes understanding the distinction between statutory and contractual leave, identifying the correct rate of pay for different types of leave, and ensuring that carry-forward and accrual arrangements are properly reflected in payroll systems.
There is also a timing point for employers. The Agency’s enforcement period is expected to run for six years, but holiday pay arrears before Royal Assent on 18 December 2025 will not be enforceable by the Agency. That does not remove the need for employers to review older practices, particularly where they shape current payroll systems, but it does help identify the period likely to be most relevant for state enforcement.
Employers should therefore use the next few months to audit holiday pay practices and close any gaps. That means checking how holiday accrual is calculated, how holiday pay is worked out for irregular-hours and part-year workers, whether rolled-up holiday pay arrangements are lawful and properly documented, and whether records are sufficiently detailed to withstand external scrutiny. Waiting until the Agency’s powers come into force may leave too little time for employers to identify problems, correct payroll processes, and manage any arrears.
In short, holiday pay is moving from a largely claimant-led risk to an employer enforcement risk. The safest course for employers is to treat compliance as an active governance issue now: review the calculations, strengthen the records, and monitor forthcoming guidance. Employers that can evidence compliance will be in a much stronger position if the Fair Work Agency comes calling.
