Employment Law Bulletin – December 2022 – Holiday Pay Special

Being on holiday is fun. However, calculating other people’s holiday entitlement and pay? Not so much. It can get very tricky, especially when irregular working patterns are involved. Unfortunately, a recent Supreme Court decision (Harpur Trust v Brazel) has not made it any easier, particularly in respect of staff who only work for part of the year. It’s made it clear that using the simple approach, as many employers do, of calculating holiday pay based on 12.07% of salary may not be enough and may result in employees bringing claims for underpayment of holiday pay.

Holiday entitlement and pay

Entitlement to annual leave in the UK is contained in the Working Time Regulations 1998 (WTR). Under these regulations all workers (including employees) are entitled to take a minimum 5.6 weeks paid leave per year. If a worker starts (or ends) part way through the leave year, this are entitled to 1/12th of annual paid leave for each month they were engaged by the employer.

The WTR says that a worker should be paid a week’s pay for a week’s holiday. The rules on this are complex, with a different approach for workers with normal working hours (a regular working pattern) and those who don’t (an irregular working pattern).

Payment for the leave should be made at the time that the worker takes the leave. The only exception is at the end of employment when the worker can be paid in lieu of any leave that they have accrued (but not taken) by the termination date.

Regular working pattern:

For these workers, a week’s leave will be their normal working week. For a full-time worker this will be five days, which means they will have 28 days’ leave per year (5 days x 5.6 weeks). For a part-time worker this will be the number of days they work per week. For example, a part-time worker who works three days per week will have 16.8 days leave per year (3 days x 5.6 weeks).

Irregular working pattern:

For workers whose days and hours of work are irregular, there is no normal working week.

For example, a worker might work six hours per day (Monday to Friday) during week 1, only four hours on Monday plus two hours on Tuesday and Thursday during week 2, and no days during week 3.

It is difficult to know (particularly in advance) what a week’s leave in days and hours looks like and what to pay.

To make it simpler, many employers (historically at least) have taken the approach that a worker with an irregular working pattern accrues holiday entitlement at the rate of 12.07% of hours worked (‘the 12.07% method’). This is because the standard working year is 46.4 weeks (that is, 52 weeks minus 5.6 weeks leave) and 5.6 weeks is 12.07% of 46.4 weeks.

So, taking our previous example, the worker would accrue 3.6 hours in week 1 (6 x 5 = 30 hours x 12.07%); 0.97 hours in week 2 (4 + 2 + 2 = 8 hours x 12.07%); and 0 hours in week 3.

If they asked to take leave in week 4, they would be entitled to 4.57 hours’ leave paid at their usual hourly rate.

However, although this practical approach has been supported by long-standing ACAS guidance, the Supreme Court has now said it does not comply with the law.

The WTR says that to calculate holiday pay for workers with an irregular working pattern, section 224 of the Employment Rights Act 1996 (ERA) applies. This says that a week’s pay is calculated by working out their average weekly pay over the 52-week ‘reference’ period immediately before the holiday (you may think it is averaged over 12 weeks, and that used to be the case, but it changed to 52 weeks in April 2020). This is known as the ‘calendar week method’. The pay reference period only includes weeks for which the worker was actually paid. Weeks for which the worker was not paid are ignored and earlier weeks are brought forward instead. This can go back as far back as 104 weeks before the holiday (but not further).

For more details of how to calculate holiday pay for workers with an irregular working pattern there is comprehensive government guidance in ‘Calculating holiday pay for workers without fixed hours or pay’ at www.gov.uk.

Part-year workers:

These are workers who have an irregular working pattern, in that they work for varying hours during only certain weeks of the year. They include, for example, those who work term-time only or on a seasonal basis (such as working at summer music festivals).

To be a ‘part-year’ worker, it is assumed they have a permanent contract for the whole year but are only paid for the weeks when they are working.

The WTR is silent on how to calculate holiday for these ‘part-year’ workers. A particularly grey area has been whether to pro-rata holiday entitlement for such employees based on how much work they carry out.

The Supreme Court has recently clarified the correct approach in the following case.

Harpur Trust v Brazel

Ms Brazel was engaged by The Harpur Trust (the Trust) to work at Bedford Girls’ School as a visiting music teacher. Ms Brazel was engaged on a permanent employment contract that continued for the whole year, but she worked irregular hours — mostly during school term-time — and was only paid for the hours she taught.

She was paid monthly at an agreed hourly rate for the hours she had worked in the previous month and was entitled to 5.6 weeks paid annual leave. She was required to take this leave during the three school holidays when she was not teaching. The Trust paid for the leave in three equal payments at the end of each school term. It calculated each payment by taking 12.07% of her total hours worked during the previous term and giving her the agreed hourly rate for that number of hours. Ms Brazel needed to accrue her holiday entitlement in this way, and it was pro-rated based on hours worked.

However, she considered she was effectively receiving less than 5.6 weeks’ paid leave and brought a deduction from wages claim in the employment tribunal. She said that it was incorrect under the WTR to use the 12.07% method. Rather she should be given the full 5.6 weeks’ leave which should be paid in accordance with the calendar week method under section 224 ERA.

The Trust argued that there should be some principle of pro rating so that holiday entitlement (and therefore pay) depends on time spent working.

Supreme Court decision

The Supreme Court agreed with Mrs Brazel.

Using the 12.07% method meant that if Ms Brazel worked fewer hours in a particular term, she would accrue less holiday, which would reduce her entitlement to below 5.6 weeks per year. This was wrong under the WTR.

Every worker, including part-year workers, should receive at least 5.6 weeks’ paid holiday for each year they remain engaged on a permanent contract. This entitlement should not be based (or pro-rated) on hours worked and pay should be calculated using the calendar week method under s224 ERA (ignoring non-working weeks).

The Supreme Court acknowledged that this could lead to a windfall for some part-year workers. In fact, the greater the number of non-working weeks, the greater their holiday entitlement (and therefore holiday pay) will be.

Example: An exam invigilator is engaged by a school on a permanent (year-round) employment contract to work three weeks per year (at 40 hours per week). She earns £600 per week. She is entitled to 5.6 weeks’ holiday per year. Pay for a week’s leave will be £600 (as all non-working weeks are ignored). She will be entitled to £3,360 holiday pay (5.6 x £600) which is more than she receives for the time she works.

However, despite this, and the fact that part-year workers would likely receive proportionately more holiday pay than full-time workers, the Supreme Court said this was the correct position under the WTR.

Who does this affect?

This is the last word from the courts on this (as there is no higher appeal court). Therefore, unless the Government reforms the law in this area, this will affect workers who…

  • Are engaged on a permanent (whole-year) contract but only work (and are paid for) part of the year (such as term-time only); and
  • Have their holiday entitlement calculated based on hours worked (using the 12.07% method or similar).

It is also likely to affect other workers who do not work a full year. For example, casual or zero-hours workers on an ‘umbrella’ contract (whereby individual assignments are connected by a continuing contract). This may even be the case when their contract terminates part way through the year.

However, the good news is that this decision should not affect…

  • Part-time workers who work on a regular working pattern throughout the year; or
  • Those who work term-time only but are paid in 12 equal monthly instalments.

In these cases, they are likely already paid in compliance with the rules, as they continue to be paid their normal salary during their 5.6 weeks of holiday.

What should we do?

The safe option is:

  • Not to use any method of calculating holiday entitlement and pay for workers with an irregular work pattern which is based on hours worked (rather than time spent engaged).
  • To use the calendar week method to calculate holiday pay for workers with an irregular work pattern.

However, if there are not enough tablets to cope with the administrative headaches this will cause (particularly if you have the 12.07% method written into your staff contracts), at least you can take the risk with eyes wide open!

If you do take the risk, then it is safest to do so when there are only a few non-working weeks per engagement (or none). This will reduce the difference in results between the 12.07% and calendar year method. You can reduce the risk further by performing a regular reconciliation (say quarterly and/or at the end of a contract) to check and pay the difference to ensure no underpayment.

Example: If the casual worker in our previous example worked their 120 hours over one four-month period and one three-month period (at 3.8 hours per week), their average weekly pay would be greatly reduced to £57.14. This would leave them entitled to £240 for 4.2 weeks’ leave using the calendar year method. A retrospective check would highlight this and you could pay them the £22.80 difference.

If you discontinue the 12.07% method in favour of the calendar year method, you will also save money by ensuring that workers have only a few non-working weeks per engagement.

If you cannot spread the work out in this way, you could use a short-term contract to cover the period of the assignment only. In this way there is less risk of non-working weeks occurring and the reduced length of the assignment will reduce the accrued holiday. This could be paid in lieu at the end of the contract.

Alternatively, use contractors who are genuinely self-employed and have no holiday entitlement.

Unfortunately, the decision sheds no light on how to convert a week’s holiday entitlement into days or hours for those with irregular working patterns. Government guidance says that to do so, employers could base it on the number of days or hours in an average week over a representative period. (‘How to calculate holiday entitlement for workers on different types of contract’, available at www.gov.uk). However, the simplest approach remains to only allow such workers to take holiday in complete weeks.

If you have been calculating holiday entitlement and pay based on 12.07%, you should also prepare for…

  • Questions from workers (with a regular working pattern) who find it unfair that they are entitled to proportionally less holiday pay than a part-year worker. They may well be right (morally), but legally there is nothing to prevent it.
  • Pressure from workers and unions to recalculate holiday pay and reimburse any underpayments.
  • Claims for unlawful deductions from wages (which can be brought within three months of the last underpayment, or termination of employment). These can include up to two years’ back pay from the date of the claim.

If you have any queries in respect of calculation of holiday entitlement or pay for your workforce, please do contact us via 01562 840060 or via info@rootshr.org.uk.