One item on the list of ‘things you didn’t notice in the Employment Rights Act 2025’ is the duty to keep records relating to annual leave and holiday pay. Section 35 of the Act introduces a new Regulation 16B into the Working Time Regulations 1998 requiring an employer to keep records that are ‘adequate to show’ whether it has complied with its obligations in relation to annual leave. The form that these records take is up to the employer, but they must be kept for at least six years. Failing to keep adequate annual leave records becomes an offence. It is not yet clear when this provision will come into force – but there is no reason why it shouldn’t happen soon.

It’s not a dramatic change – but it is worth bearing mind when we look at creation of the Fair Work Agency which is expected to be set up and running this April. The Government has set a lot of store by the Fair Work Agency – but I have to confess I haven’t paid much attention to it. Oddly the Employment Rights Act itself makes no mention of it. Instead what it does is give the Secretary of State the power to enforce particular areas of employment law, allows those powers to be delegated to officials, requires the appointment of an advisory board and the publication of a three year enforcement strategy and annual reports. The Fair Work Agency will then be set up as an executive agency within the Department for Business and Trade. This means that it will have its own budget and managerial structure, but it will not be a legal entity in its own right. It will not have the independence of Acas or the Equality Commission but will carry out the labour market enforcement functions of the Secretary of State in line with Government policy. 

To an extent the agency will simply bring existing enforcement functions under one roof. The minimum wage enforcement teams currently sitting within HMRC will be transferred as will employees of the Employment Agency Standards Inspectorate – although they are already employed in the Department for Business so they won’t have to move far. The Fair Work Agency will also take over the functions of the Gangmasters and Labour Abuse Authority which the Employment Rights Act abolishes (S.148). 

None of this may seem very interesting – just an internal reorganisation of existing functions. But the Employment Rights Act also extends the enforcement powers of the Secretary of State to cover SSP and paid annual leave. That means that an employer that is not paying statutory sick pay or complying with its obligations to provide paid annual leave is subject to broadly the same regime of inspections, notices of underpayments and financial penalties that currently face employers not paying the minimum wage. If the Agency is given the resources to tackle those issues in a meaningful way then that will be an important change. 

If an employer is given a notice of underpayment in relation to an individual it will also – unless the Secretary of State provides for exceptions – be required to pay an additional financial penalty directly to the Government. The amount of the penalty is set at 200% of the amount owed to each individual covered by the notice to a maximum of £20,000 per individual. If you’re a logistics company and have wrongly assumed that your huge team of delivery drivers are not workers and so are not entitled to holiday pay, then that could prove very expensive.

And viewed in that context, the new duty to keep accurate records of paid annual leave may be significant. There is no duty on employers to keep records of Statutory Sick Pay. There used to be one, but it was revoked back in 2014. So if I were an inspector, I might struggle to audit the extent to which an employer was complying with its duties to pay SSP. When it comes to paid annual leave, however, an inspector could simply ask the employer to produce its records demonstrating compliance. If those records are not adequate then that would give good grounds for a more detailed investigation potentially leading to enforcement action. As we know, getting annual leave right is not straightforward – particularly for workers with complex working patterns or pay arrangements – so many employers may be underpaying their staff. Indeed, the Resolution Foundation has estimated that as many as 900,000 qualifying workers may be given no paid annual leave at all.  

But just how active will the Fair Work Agency be in pursuing its enforcement functions? That is the key question. There were 750 penalty notices issued in relation to the Minimum Wage in 2024/25, while the Office for National Statistics estimates that some 447,000 workers are paid less than the minimum wage. So far, Government enforcement of employment law has barely scratched the surface of non-compliance. Resources for the new agency are likely to be tight and I would be surprised if its budget allowed for any real change in the overall picture.

It might be worth double checking your annual leave records though – just to be on the safe side.