Holiday Pay After Harpur V Brazel
The Supreme Court has recently decided (in the case of Harpur Trust v Brazel) that the method usually used in the past (for instance by ACAS) to calculate holiday pay for workers with irregular hours was incorrect. This will have wide-reaching implications for any organisations who engage zero-hours, term-time only or part-year workers (ie workers on permanent contracts who only work for part of the year.)
Holiday Entitlement and Pay – the Background Law
Entitlement to paid annual leave in the UK comes from the Working Time Regulations (WTR), which state that all workers are entitled to minimum of 5.6 weeks’ paid holiday. The WTR also say that a worker should be paid a week’s pay for a week’s holiday. Calculating that pay however, becomes complex when a worker has irregular working patterns. Regulation 16 of the WTR specifies that for those working atypical hours, pay is calculated on the basis of the average earnings over the preceding 52 weeks in which the employee actually worked, any week in which the worker did not work or earn anything being ignored.
The Pre-Judgment Approach
Previous ACAS guidance provided a method by which the amount of paid holiday due for those working atypical hours could be calculated on a pro rata basis, namely by multiplying the earnings of the worker over the year by 12.07 per cent (that being the proportion that 5.6 weeks bears to the working year of 46.4 weeks). This method provided a practical solution that gave workers with irregular hours holiday pay in the same proportion to hours actually worked as for workers with regular hours and was widely followed. The Harpur V Brazel judgement has ruled that this practical method conflicts with the WTR and so is not legal.
The case in dispute involved Ms Brazel, a music teacher at a school run by the Trust, who was employed on a permanent contract but worked only in term time. She was paid only for the hours she taught, which varied from week to week. In 2011, the Trust changed how it calculated her holiday pay. In line with common practice and following the then ACAS guidance, the Trust multiplied the hours she worked by 12.07 per cent and then multiplied that figure by her hourly rate of pay. That sum was then paid as holiday pay. Ms Brazel argued that this resulted in her receiving less paid holiday than under the calculation that the Trust had previously used. She brought a claim for unlawful deduction from wages on the basis that she was being underpaid for her holiday. The Trust argued that the method used since 2011 reflected her accrued leave in proportion to the hours she actually worked.
The Supreme Court Decision
Mrs Brazel’s claim was rejected by the Employment Tribunal. However, she appealed and the claim eventually reached the Supreme Court, which decided in her favour. It made it clear that all part-year workers are entitled to 5.6 weeks’ paid holiday each year and that workers, like Ms Brazel, whose pay varies must have their holiday pay calculated in accordance with the formula for a “week’s pay” set out in the Employment Rights Act 1996 and not on a pro rata basis.
One of the Trust’s arguments was that European Union Law, which at the relevant time overrode UK law, required different workers to be treated on the same basis, so that it was necessary to use a pro rata approach to calculating holiday pay for all workers. The Supreme Court rejected that argument. It held that EU law did not require holiday entitlement to be pro-rated in all circumstances and that some workers could be allowed a more favourable holiday calculation. . It also stated that the UK legislation implementing the UK law did not make any provision allowing for pro-rated holiday entitlement for part-year workers but required it to be based on average pay in the relevant weeks actually worked.
The Trust also argued that the week’s pay basis meant that some situations could give rise to absurd results (for instance an exam invigilator who worked long hours for only 3 weeks each year would be entitled to 5.6 weeks paid holiday with holiday pay based on the pay in the weeks worked. The Trust put forward other possible methods of calculating holiday pay to avoid such results..
The court stated that the alternative methods put forward by the Trust were fundamentally inconsistent with the legislation. The difference between the holiday entitlement of a full and part-year worker came in the reduced amount of holiday pay for part time workers given that their pay per week would be less than if they had worked full time. .
The Supreme Court recognised that applying the wording of the relevant UK legislation might result in odd anomalies in unusual cases, but held that this did not justify a fundamental re-reading of the statute. Parliament must be assumed to have intended to mean what the legislation clearly states and not some alternative method of calculation.
Implications of the Supreme Court Decision
This case illustrates how complicated it can be to calculate holiday pay for part-year workers. Prior to this decision, the standard approach (supported by ACAS Guidance on holiday pay for casual workers) was to do as the Trust did in this case and to calculate holiday pay using the 12.07% method. ACAS has now withdrawn its previous guidance to reflect the Supreme Court’s decision.
The law has not actually been changed by the Supreme Court’s decision, but the way in which it must be interpreted in future has indeed changed There is no further appeal beyond the Supreme Court. Unless there is a change in the legislation (which seems unlikely in the current climate), the law in this area is now settled: for part-year workers. Their entitlement to holiday is 5.6 weeks per year and their holiday pay should be calculated by reference to average earnings over the last 52 weeks in which they actually worked, not by reference to the total hours worked.
This decision leaves employers who have previously calculated holiday pay on a different basis at risk of workers claiming for underpaid holiday pay. Workers affected can now use deduction from wages claims to recoup holiday pay owing for the two-year period preceding the claim. If an employer has a number of workers working under a similar arrangement, this may represent a significant financial cost.
Who is Affected?
This judgment will affect the previous holiday pay calculation for workers who:
- Are on permanent (whole year) contracts who have irregular working patterns and have previously had their holiday entitlement calculated on the basis of their working patten or hours worked (using the 12.07% method or similar).
- The decision is also likely to affect other workers who do not work a full year and have had their holiday pay calculated on a basis other than that set out by the Supreme Court. For example, casual or zero-hours workers on an ‘umbrella’ contract (whereby individual assignments are connected by a continuing contract) whose holiday pay has been calculated on a basis other than that specified by the Supreme Court.
This means that the decision does not apply to full-time workers, part-time workers with regular hours each week, or any worker with a fixed salary rather than pay varying with hours worked. For example, a teaching assistant (whether part-time or full-time) on a permanent term-time only contract, who is paid a salary, will not be impacted by the Supreme Court’s decision.
Actions that need to be taken / How to respond to the decision / What to do now
Employers will now need to make a number of decisions on how to deal with the implications of this case. Employers should review their holiday practices and contracts to understand whether they comply with the Supreme Court judgment. The following steps should be taken:
- You must ensure that every worker you employ receives at least 5.6 weeks holiday with pay each year. The only circumstances where you can lawfully pro-rate a worker’s holiday is where they start or end their employment part way through your relevant leave year.
- Stop using any method of calculating holiday entitlement and pay for workers with an irregular work pattern which is based on total hours worked (rather than average pay in the relevant weeks) such as the 12.07% method or anything similar.
- For all workers with an irregular work pattern the calendar week method should in future be used to calculate holiday pay. See ‘How to calculate holiday entitlement for workers on different types of contract’ available at www.gov.uk
- Conduct an audit to find who you employ or engage (or have employed or engaged) on a permanent contract but for only part of the year and so who might be affected by the Supreme Court’s decision. Work out what the difference is between what they are currently being paid for holiday pay and what they should be paid following the Supreme Court’s decision. This is your annual underpayment and should help quantify potential exposure to potential claims for arrears of holiday pay.
In thinking about who might be affected, you will need to consider how far back to look. In general, a claim for unlawful deduction of wages can be brought for a maximum of two years’ back pay. A claim needs to be brought within three months from the date of the last deduction. Accordingly, you will need to note the most recent date on which holiday pay was paid to each affected worker.
- If you have insurance cover that would apply to such claims, You should speak to your insurance broker to advise them what your current liability may be, although they may not be interested unless a claim is actually made.
- Management should consider the implications of the case and plan how to deal with possible claims. After completing an audit to identify exposure, they should consider whether to calculate and offer back payments to staff who have been underpaid, or to wait for employees to raise the issue of historic holiday pay. They should in either case ensure that the method specified by the Supreme Court is used in future.
When making this decision you should be aware that trade unions are very aware of this judgement. Organisations that recognise a union should be prepared for unions to ask about what they are planning to do following this decision. There may be pressure from both workers and unions to recalculate holiday pay and to reimburse any underpayments.
You should also be prepared for questions from workers with a regular pattern of work who find it unfair that they are entitled to proportionally less holiday pay than a part-year worker. Whilst they may argue this is morally incorrect, your defence is that legally you are obliged to pay workers with variable hours on this basis.
- In the longer term, it is sensible to consider whether to move away from engaging workers on permanent contracts with irregular hours. For example, an employer may wish to use fixed-term contracts for a specific period of time to avoid this issue or to employ individuals on a self-employed/freelance basis if the work to be undertaken is short and irregular. The Supreme Court felt that some of the anomalous results pointed out by the Trust (such as the exam invigilator working 3 weeks per year but entitled to 5.6 weeks holiday with pay based on earnings during the working weeks) would be unlikely in practice because such invigilators were unlikely to be permanent employees.
It is important to note that the Supreme Court’s decision does leave a lot of questions unanswered. For example, the decision doesn’t state how to convert a week’s holiday pay into days or hours for those with irregular work 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 of time. However, the simplest approach remains to allow holiday to be taken only in complete weeks. No doubt further litigation will result from these various ‘unknowns’ the judgment has thrown up and we will continue to update you as case law develops in this area.