In our previous article, we discussed the new record-keeping duty introduced by the Employment Rights Act 2025 (“ERA 2025”), requiring employers to keep records demonstrating compliance with annual leave rules from 6 April 2026. Employers’ compliance with, and any breaches of, this duty will be enforced by the Fair Work Agency (“FWA”). 

The FWA will also be responsible for promoting compliance, investigating non-compliance and acting where employers fail to meet their holiday pay obligations. The government has launched a consultation (the “Consultation”) inviting views on how the FWA’s compliance and enforcement framework will operate in practice. The Consultation is open until 22 September 2026.

How is holiday pay currently enforced and how will this change? 

Currently, workers who believe that they have been underpaid holiday pay must seek redress by making an employment tribunal claim (“ET claim”). 

However, the ERA 2025 gives the FWA power to uphold compliance with holiday pay law, take enforcement action and recover holiday pay arrears on behalf of workers. FWA enforcement: 

• Will likely be quicker and more efficient than a worker bringing an ET claim.
• Will be free for workers. 
• Can take a ‘whole employer’ approach to holiday pay compliance, and assess compliance for the business’s entire workforce, not just single workers’ claims.

While enforcement by the FWA does not replace a worker’s right to make an ET claim, workers cannot recover the same arrears from both an Employment Tribunal and the FWA. An Employment Tribunal may also decide not to consider a claim which is concurrently being investigated by the FWA. 

What will the FWA enforce?

The FWA will only enforce statutory holiday pay entitlement (i.e. the 28 days’ holiday that full-time workers are entitled to under the Working Time Regulations 1998). Where a worker’s contract provides for a holiday entitlement greater than the statutory minimum, the FWA will not enforce this additional entitlement - with workers able to bring an ET claim for contractual holiday pay which exceeds their statutory entitlement.  

The FWA’s remit will cover (but not be limited to) instances where statutory holiday pay has not been paid, has been underpaid, or has been calculated incorrectly - including where an employer has refused to grant a worker holiday entitlement or refused to allow holiday entitlement to carry over.

What approach and enforcement tools will the FWA adopt?

The Consultation seeks views on the following aspects of the FWA’s proposed approach to holiday pay compliance and enforcement:  

• Proportionate and supportive approach: the FWA seeks views on its proposed proportionate and supportive approach to facilitate employer compliance with holiday pay law. This includes giving employers the opportunity to correct underpayments rather than moving straight to punitive enforcement action, with penalties generally not issued in cases where employers correctly repay all holiday pay arrears before an FWA investigation.
• Guidance: the FWA intends to provide guidance to workers and employers to help them understand their rights and obligations, including:
  • Worked examples illustrating how holiday pay law will apply.
  • A chat-bot and webinars to explain holiday pay entitlements.
  • A detailed calculator to work out holiday pay entitlement. 

The Consultation invites views on what further support should be provided to employers. 

• Enforcement tools: in addition to the supportive compliance-focused activities detailed above, the FWA will have investigatory powers and the ability to issue notices of underpayment - requiring employers to pay any holiday pay arrears to workers and a civil penalty to the government. The Consultation invites views on whether further enforcement activities should be undertaken by the FWA. 

• ‘Name and shame’: the Consultation seeks views on whether the FWA should operate a ‘name and shame’ list detailing employers who have underpaid holiday pay (similar to the list issued by the Department for Business and Trade in respect of minimum wage compliance).   

What are the proposed time limits and sanctions for non-compliance? 

The Consultation seeks views on specific aspects of the holiday pay enforcement framework which will be determined through commencement regulations including:  

• Time limit for holiday pay claims: it is proposed that the time limit for the FWA to enforce holiday pay on behalf of a worker will be six years from the date the underpayment occurred. 

This mirrors employers’ record-keeping obligations and minimum wage enforcement — and is notably longer than the three-month (or six-month from October 2026) ET time limit for workers. However, holiday pay claims will not be enforceable by the FWA where the underpayment arose before 18 December 2025 (i.e. when the ERA 2025 received Royal Assent).

• Financial penalties when a notice of underpayment is issued: it is proposed that the same civil penalty settings currently in force in relation to the national minimum wage be imposed in relation to holiday pay, namely:
  • a penalty amount of 200% of arrears per worker, capped at £20,000 per worker; and
  • a minimum penalty of £100 per case (regardless of the number of workers). 

Where employers pay all unpaid arrears and half of the penalty within 14 days of the issue of the notice of underpayment, the remaining 50% of the penalty will not be payable. 

• Approach to be taken in respect of lower paid workers: the Consultation recognises that lower paid workers may be more at risk of not receiving the correct holiday pay and therefore seeks views on:
  • ‘Capping’ the maximum arrears a worker can receive from FWA enforcement, which may disincentivise higher paid workers from having their rights enforced by the FWA.
  • Prioritising and assessing holiday complaints to focus on lower paid workers.
  • Targeting holiday pay compliance and enforcement activity in geographical areas where there are higher concentrations of lower paid workers. 

Additionally, the Consultation seeks feedback on the use of rolled-up holiday pay for irregular hours workers (where holiday pay is paid as an uplift of 12.07% on a worker’s remuneration), and whether such arrangements are used in practice and are easy to operate. 

So what for employers? 

The holiday pay rules are complex, and many employers inadvertently get it wrong. Therefore, additional guidance and the FWA’s proposed supportive approach towards holiday pay compliance and enforcement will be welcomed.

However, the significant increase in the time limit for bringing a holiday pay claim from three months (for individual claims) to six years (for claims brought by the FWA), could result in increased claims and financial exposure for employers. Therefore, although the FWA’s enforcement of holiday pay compliance is due to commence in 2027, prudent employers may wish to review their current holiday pay arrangements and policies in relation to carry-over of holiday entitlement, to ensure compliance and mitigate the risk of FWA involvement.

If you would like to discuss how our team of experienced employment lawyers can support your organisation, please get in touch. You can also find further resources on all things ERA 2025 on our ERA 2025 hub.