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HR teams are being urged to review their holiday pay calculations after the government launched a consultation on plans to give the Fair Work Agency new powers to investigate underpayments and recover arrears on behalf of workers.

The consultation sets out how the new enforcement regime could operate from 2027. Under the proposals, the FWA would be able to investigate statutory holiday pay underpayments, recover unpaid sums for workers and issue financial penalties where employers fail to comply.

The consultation comes as new research suggests many organisations may already be at risk of falling foul of the rules. According to accounting firm RSM UK’s latest Workforce Survey, 56% of businesses pay all types of holiday pay at the same rate, indicating that many employers could be calculating holiday pay incorrectly.

While 61% of employers said they used bespoke software tailored to their workforce to calculate holiday pay, a third (33%) relied on default software settings and 11% calculated holiday pay manually – approaches that could increase the risk of errors.

The proposals under the Employment Rights Act 2025 mark a significant shift away from the current system, under which workers who believe they have been underpaid generally have to pursue claims through an employment tribunal. Instead, the FWA would be able to investigate employers directly and, rather than focusing solely on an individual complaint, examine holiday pay compliance across an employer’s entire workforce.

The government said the new regime would be designed to encourage compliance rather than punish employers. It proposes allowing organisations to avoid financial penalties where they voluntarily repay any holiday pay owed before an investigation begins. However, where enforcement action is required, penalties could mirror those used for national minimum wage breaches, with employers facing fines of up to 200% of the arrears owed, subject to statutory limits.

The consultation also seeks views on whether employers found to have underpaid holiday pay should be publicly named, similar to the existing naming scheme for national minimum wage offenders.

One of the most significant proposals is to give the Fair Work Agency powers to recover holiday pay arrears going back six years, considerably longer than the current employment tribunal time limits. The government also intends the agency to prioritise enforcement activity among lower-paid and more vulnerable workers, including those with irregular hours or part-year contracts.

Chris Robson, employment tax partner and fair pay lead at RSM UK, said: “This consultation is a signal to employers that they need to look at holiday pay in much more detail now to ensure they get it right and avoid enforcement action. Holiday pay can be a very complex area to get right, and the buck stops with the employer, regardless of what third party payroll providers or software systems may be used.

“Whereas many have in the past relied on default software offered, employers now need to consider what the new rules are and how these apply to their workers. This could be wide and varied, depending on the wording of contracts, their working patterns, elements of pay, and whether they are permanent, temporary or contractor staff.

“While initial enforcement is not anticipated to be as hard hitting as the current National Minimum Wage enforcement, we anticipate the Fair Work Agency will likely mirror the approach taken on enforcement of the NMW, with large fines and public naming of employers that are found to be in breach of the rules.”

He added: “We’re encouraging all employers to check their holiday pay systems and processes to ensure full compliance ahead of the Fair Work Agency’s enforcement next year, and not simply rely on standard functionality or calculations offered, which do not take the new rules into account. We’d also encourage them to take this opportunity to respond to the government’s consultation and have their say on the Fair Work Agency’s enforcement approach.”

Meanwhile, the Fair Work Agency’s framework agreement, explaining details of the body’s governance and responsibilities was published today (9 July) by the government.

The consultation on holiday pay closes on 22 September. Alongside seeking views on enforcement powers and penalties, the government is also considering practical measures to help employers comply, including holiday pay calculators and digital guidance.

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