In July 2022, the Supreme Court determined that part-year workers should not have their holiday pay pro-rated by the proportion of the year they have worked. Holiday pay can often be a tricky point for employers particularly if they have staff with varied working arrangements and so it is important to get this right.

However, it appears that the Government is now attempting to intervene in light of the judgment due to the disproportionate results which could arise between part-year, and part-time workers, with the publication of its new consultation. We will therefore discuss the judgment and what this means for those working part of the year, such as term-time employees, as well as the Government’s consultation in this area.

Calculating holiday pay entitlement

It has always been the case that employees and workers on full-year, fixed hours have a minimum of 5.6 weeks’ paid annual leave a year. This is comprised of 4 weeks (20 days) as stipulated under the Working Time Directive, and an additional 1.6 weeks under the Working Time Regulations to account for bank holidays in the UK (8 days a year), amounting to 28 days in total.

The Working Time Regulations provide that holiday pay is calculated at the rate of a weeks’ pay. Subsequent case law has confirmed that a weeks’ pay should be calculated by reference to a person’s normal earnings, including: travel allowances; commission; and non-guaranteed and voluntary overtime. An employer is then required to look at the worker’s earnings over the previous 52 weeks to determine their average earnings, and pay holiday pay based on this.

Therefore, this is relatively straightforward for employers to calculate for regular full-year staff on fixed hours and does not often give rise to any difficulties.

Confusion would often arise however for staff on part-year, term-time or irregular working arrangements, who may therefore work a different number of days or hours a week.

Previously, guidance suggested that employers calculate holiday entitlement on the basis of 12.07% of hours worked. This was on the basis that:

• workers were entitled to 5.6 weeks’ paid holiday each year
• this left 46.4 weeks remaining
• 5.6 is 12.07% of 46.4

Therefore, 12.07% represented holiday expressed as a percentage of working time.

Harpur Trust v Brazel

Ms Brazel was a visiting music teacher at the Trust and was engaged on a zero hours contract, but worked only during term-time and was only paid for the hours she taught, which could therefore vary from week to week. Ms Brazel took holiday outside of term time.

Following guidance at the time, the Trust calculated Ms Brazel’s holiday pay entitlement on the basis of 12.07% of her hours worked, and then multiplied this by her hourly pay to determine what her holiday pay total should be.

Ms Brazel ultimately brought a claim, claiming that her holiday as calculated by the Trust resulted in her receiving less than under the general approach of 5.6 weeks’ entitlement. The Trust defended the claim on the basis that the 12.07% method reflected her leave accrued proportionately to the hours she worked during the year.

The Court of Appeal decided in favour of Ms Brazel. The Trust subsequently appealed to the Supreme Court.

Supreme Court decision

The Supreme Court upheld the Court of Appeal decision and rejected the Trust’s arguments. It held that an employee or worker is entitled to 5.6 weeks’ holiday, and holiday accrues whilst a contract is in place. Whilst the claimant only worked some weeks throughout the year, she was on a zero hours contract for the whole year and was therefore entitled to 5.6 weeks’ annual leave.

The Supreme Court also rejected arguments that the 5.6 weeks’ entitlement should be pro-rated, and held that a weeks’ pay should be calculated based on the approved approach to a week’s pay, as outlined above.

However, the difficulty with this decision for determining a weeks’ pay results from the fact that, in order to calculate a weeks’ pay, you only calculate weeks in which remuneration was due over the preceding 52 weeks, discounting any weeks where the individual was not paid (with a maximum reference period of 104 weeks). Of course, if an individual works for part of the year, there will be many weeks where they receive no pay.

This difficulty can be illustrated by way of example:

• An employee, A, works 20 hours per week (part-time), for 46.4 working weeks in the year
• Another employee, B, works 40 hours but only works half of the year (so 23.2 weeks in a year)
• Over a year, both employees therefore work 928 hours
• Both employees are paid £11 an hour

On the basis they both work the same hours and are paid the same pay, one may therefore assume that they should receive the same holiday pay.
However:

Employee A

• They are entitled to 5.6 weeks’ holiday
• A weeks’ pay would be 20 x £11, or £220
• They are entitled to £220 a week, or £1,232 per year (£220 x 5.6)

Employee B

• They are also entitled to 5.6 weeks’ which, based on Harpur, is not pro-rated even though they work part of the year
• A weeks’ pay requires you to only look at working weeks over the last 52 weeks, so ignore non-working weeks
• So, a weeks’ pay would be 40 x £11, or £440
• Therefore, they are entitled to £440 a week, or £2,464 per year (£440 x 5.6)

Therefore, in practice there may be two employees on the same number of hours and at the same rate of pay, but those on part-year or term-time working arrangements would receive double the holiday pay as those working each week – a potential scenario which has faced criticism and backlash from employers.

Government Consultation

The Government’s publication of its consultation document in January 2023 has been triggered by the disparity shown in the above example, in that part-year workers are now entitled to a larger holiday entitlement than part-time workers as a result of the Harpur Trust judgement.

The consultation highlights that the Government is considering introducing legislation which would allow employers to pro-rate holiday entitlement for part-year workers in accordance with the annual hours they work, thereby reducing the disproportionate effects of the Supreme Court ruling.

In terms of the reference period for this calculation, the Government intends to keep the 52 week reference period but with the difference being that this could include weeks where the individual does not work. The aim of this change is to align workers’ holiday entitlement with the actual time they spend working.

Therefore, in what appears to be a shift back to the previous guidance, the Government proposes that an employer could calculate annual leave entitlement for part-year workers and those with irregular hours by calculating the total hours worked in a 52 week period (including weeks without work), and multiplying this by 12.07%.

The consultation seeks to gain the views of as many stakeholders as possible, and is requesting responses up until the closing date of 9 March 2023.

Comment

The decision of the Supreme Court was surprising given the effect that the benefit this can provide to casual, part-year workers over workers engaged every week and the disproportionate effects can therefore result. However, the decision does strictly follow the wording of the legislation.

The final ruling from the UK’s highest court impacts upon all casual staff working part of the year and it is therefore one for employers to be particularly mindful of, who may previously have been using the recommended 12.07% approach (which has since been withdrawn from guidance). Given that this is now the final determination on the issue for now, employers must ensure compliance or they risk holiday pay claims from staff. We therefore suggest you review the annual leave arrangements for all part-year workers, particularly those on term-time only contracts.

The Government has previously produced a guidance page which allows employers to input information about staff to clarify the holiday entitlement, which we would recommend reviewing if there is any uncertainty.

However, the consultation, if successful, could result in new legislation which provides a return to the 12.07% method of calculation for part-year workers. Therefore, unfortunately employers may feel in a state of confusion currently in relation to holiday entitlement. For now, employers should continue with the method resulting from the Supreme Court judgment and will no doubt be awaiting the results of the consultation.

We will keep you informed of the results of the consultation and let you know if your method for calculating the holiday pay of part-year workers should be changed – again!

Please also feel free to contact a member of the Employment team if you have any questions on the contents of this blog.