The introduction of the Fair Work Agency (“FWA”) in April 2026 could significantly change how holiday pay compliance is monitored and enforced.
In addition, the Employment Rights Act 2025 (“ERA 2025”) will introduce new statutory duties into the Working Time Regulations 1998 (“WTR”) around holiday pay recordkeeping that employers should address well ahead of implementation.
New Statutory Duty to Keep Detailed Holiday Pay Records
The WTR are going to be amended to require employers to maintain documentation adequate to show that workers have received the holiday pay and annual leave they are entitled to.
This requirement is intended to support enforcement activity by providing clear evidence of:
- Workers’ annual leave entitlement
- How holiday pay has been calculated
- When and how holiday pay has been paid
Prudent employers should already be keeping records of workers’ holiday history in order to defend any potential claim that a worker has not received their full annual leave or holiday pay entitlement. However, as part of a raft of reforms being introduced as part of the ERA 2025, employers will have a statutory obligation to ensure that that they maintain accurate, auditable records for each worker. This could be through payslips (clearly showing the amount of holiday pay which has been advanced or accrued), holiday/absence trackers, email correspondence or other means.
The enforcement powers of the new FWA will cover holiday pay (and other statutory payments, such as sick pay). This means that an employer who cannot demonstrate to the FWA’s satisfaction that holiday pay is being paid correctly, could be subject to broadly the same regime of inspections, notices of underpayments and financial penalties that currently face employers not paying the National Minimum Wage.
There is currently no set implementation date for the new obligation to keep adequate holiday records. However, the FWA will have the power to inspect and enforce employers’ holiday pay practices once it comes into being in April 2026, although we anticipate that it will take some time for the FWA to find its feet.
The Shift to State Led Enforcement of Holiday Pay
Currently, holiday pay underpayments have to be enforced by individual workers via Employment Tribunal claims. Such claims have been relatively uncommon, in part because workers may not identify errors in complex holiday pay calculations.
Marking a fundamental shift in approach, the FWA will have the power to enforce statutory holiday pay, shifting the system from a claimantled approach to proactive state enforcement. Under this model, the FWA will be able to investigate compliance without any worker complaint, require employers to repay underpayments going back six years, impose penalties of up to 200% of the underpaid amount (reduced to 100% for early repayment), and require that any underpayment notices are satisfied within 28 days, mirroring the existing National Minimum Wage enforcement framework.
Implications for Umbrella Companies
Umbrella companies sit at a particularly high-risk intersection: complex supply chains and pay arrangements, varied assignments and multiple end clients, can make holiday pay calculations challenging even before reforms.
Weaknesses in recordkeeping and unclear communication of holiday entitlement can also create compliance risks. With a sixyear recovery period and automatic penalties enforceable by the FWA, even small calculation errors can result in significant liabilities if underpayments are identified.
The combination of new reporting duties under the WTR and the FWA’s enhanced enforcement powers means umbrella employers should expect greater scrutiny of how holiday entitlement is calculated; the methods used to determine holiday pay; the accuracy and completeness of payroll records, and the consistency between contractual terms, pay practices and recordkeeping.
What should you do now?
Many aspects of the FWA’s operational approach, including investigation procedures and recordkeeping expectations, will be further detailed in forthcoming guidance and secondary legislation over the course of 2026. Employers should remain alert to updated Government publications to ensure they can make any necessary adjustments ahead of the FWA’s widened remit.
In the meantime, it is recommended that employers should review their existing holiday pay arrangements, carry out internal audits to identify and correct any underpayments, and update policies, systems, and worker documentation to meet the proposed new recordkeeping requirements. They should also ensure processes are in place to retain records for at least six years and continue monitoring Government announcements on the FWA and forthcoming regulations.
