Paid holiday is a fundamental and long-established feature of UK employment contracts. But the question of how employers calculate holiday pay for workers with variable hours has been the subject of much debate. This issue has recently been settled by the Supreme Court, which delivered its judgment on the matter in July in the case of Harpur Trust v Brazel . In doing so, it upheld the Court of Appeal’s 2019 decision in the case: that part-year workers should not have their paid holiday apportioned.
The case was originally brought by Mrs Brazel, a music teacher who was employed on a permanent zero-hours contract by Harpur Trust, a charity which operates a number of independent schools and one academy in Bedford. Her permanent contract applied only during term-times and she was only paid for the hours that she taught, which varied from one week to the next. Mrs Brazel took holidays at the end of each term that coincided with the lengthy school holidays.
In 2011, Harpur Trust changed its calculation of her holiday pay: following guidance from ACAS which then applied, the hours she worked were multiplied by 12.07 per cent and then multiplied again by her hourly rate of pay in order to calculate her holiday pay. This Percentage Method has been commonly used by some employers of workers with variable hours to calculate the holiday entitlement that has accrued by virtue of hours worked, making their paid holidays pro-rated.
The basis of the calculation originated in The Working Time Regulations 1998 (WTR), which implemented the EU’s Working Time Directive. These provide that a full-time employee working a standard 46.4 week working year is entitled to 5.6 weeks’ paid holiday a year. All workers, (except those who are genuinely self-employed), are legally entitled to this paid holiday.
In this context, the exact amount of holiday payments for workers who do not have normal working hours will depend on the average weekly pay, based on the average earnings of a 52-week reference period.
Because she worked irregular hours and had extended holiday periods where she did not work during school holidays, Mrs Brazel argued that she was disadvantaged by the use of 12.07 per cent in calculating her holiday pay. Her case was brought on the basis that there had been an unlawful deduction of wages because under the WTR, her holiday pay would instead have been 17.5 per cent of her annual earnings. She calculated that she had been underpaid by around £235 per term.
In appealing the case to the Supreme Court, Harpur Trust argued that the 12.07 per cent calculation reflected her accrued leave in proportion to the hours she had worked, and that EU law (on which the WTR is based) requires holiday entitlement to be pro-rated. Harpur Trust further argued that it was an absurd position for someone who worked only part of the year to receive a higher percentage of holiday entitlement (proportionate to the time they worked) than someone who worked full time.
But the Supreme Court did not accept Harpur Trust’s arguments. The judges comprehensively and unanimously rejected the percentage method and upheld the Court of Appeal’s 2019 decision that part-year workers should not have their paid holiday pro-rated.
In doing so, the Court finally settled the issue of the correct method that employers should use for calculating the holiday pay of employees who only work for certain parts of the year. It confirmed that the entitlement to 5.6 weeks’ holiday applies both to permanent and to part-year workers in full, without any pro-rating being applied. For workers who do not have normal working hours, pay should be calculated by reference to the hours worked over a 52-week average, rather than being limited by the number of hours a worker has worked. It categorically rejected the widely used 12.07% method.
Inevitably, this landmark decision will have wide-reaching implications for multiple organisations that engage zero-hours or part-year workers who have permanent employment contracts but who do not work all of the year.
So, what does this mean in practice?
The Harpur decision does not change the law on holiday pay, but instead clarifies it, confirming that applying 12.07 per cent of additional holiday pay for part year workers does not comply with the WTR and would be unlawful.
Although the Supreme Court ruling applies to all workers, it only materially affects workers who do not have normal working hours – particularly those who work for just part of the year on a year-round contract, but not on normal hours. Employers must now change how they calculate holiday pay for these employees – seasonal, term-time only and zero hours contract staff – in order to comply with the Harpur decision.
Notably, the 52-week average calculation period was introduced on April 6 2020. This was previously 12 weeks before the date of the holiday leave. Some of the original concerns identified by the Harpur case (which predates that change) are therefore no longer applicable.
For workers doing regular salaried hours (either full time or part time) throughout the year, working out holiday entitlement and pay is far less problematic. Provided a worker remains under contract, they have an entitlement to 5.6 weeks’ holiday in each year, regardless of the amount of work done.
To the extent that holiday can be said to “accrue” in any meaningful sense (in the first and last years of employment), that accrual is based purely on the passage of time under the contract, and not on the amount of work done in that time. We therefore have a system where non-working weeks are included for calculating accrued holiday entitlement, but ignored when calculating holiday pay.
The biggest impact of the Supreme Court judgment will be that for employers with workers who work infrequently may be better off on a short-term fixed term contract. For example, an exam invigilator who works three 40-hour weeks would get 5.6 weeks holiday – more than double their working year and working pay which may rightly be regarded as ludicrous. Accordingly, switching them onto a fixed term one off contract, or using an agency so that holiday accrued but untaken is paid on termination of that contract, would be better. Since they will have not worked a full year, they cannot get a full year’s entitlement.
Some employers may react to this decision by changing the way in which they use zero-hours contracts. For example, they might ensure that zero-hours workers are given at least some work every week when they are not taking annual leave, or they might choose to move away from zero hours contracts completely. The hospitality industry could be particularly impacted since they are notably big users of zero hours, especially at a time when there are so many other economic factors in play. Zero hours contracts have themselves received quite negative press of recent years.
In other circumstances involving term-time workers such as Mrs Brazel, it may be possible to engage them at the beginning of term on a fixed-term contract for the duration of the term, give them a week’s paid holiday during half-term, and a payment in lieu of any outstanding accrued holiday at the end of term, before re-engaging them again after the school holidays.
However, this may potentially lead to questions as to whether continuity is preserved during any breaks, and whether continued use of fixed-term contracts after four years is objectively justified. This brings additional potential challenges. To mitigate any adverse impact, employers may be advised to change contracts to annualised hours so employees get paid 12 monthly payments and take holiday during school holidays which is counted towards that legal minimum.
Practitioners also face challenges, not least the potentially tricky question of how to best calculate holiday pay for part-year workers, casual workers, and others who work irregular hours, in order to be legally compliant. In practice, the only reliable answer will be to use the Calendar Week Method: if a worker takes a week’s holiday, then they should receive a week’s pay calculated according to a statutory formula specified by the WTR. Since this may produce a different rate of pay each time holiday is taken, it could become a payroll nightmare to implement. It may be that this headache can be resolved by further legislation to resolve the payroll nightmare.
It is now likely that we may see a flurry of unlawful deductions claims being made in the tribunals from workers who have had their holiday pay calculated on the Percentage Method. Indeed, it is probable that such claims had already been brought and stayed pending the Supreme Court’s decision. It should be remembered that claims for unlawful deductions from wages must generally be brought during employment or within three months of the final payday on termination, and can only include up to two years’ back pay from the date of the claim. We could therefore see a flood of additional claims for employer clients into a system that is already overwhelmed.
It is perhaps self-evident that employers should review their current employment contracts and associated holiday entitlement calculations in order to determine whether they are compliant with the law, as confirmed by the Harpur decision. In assessing risks and making changes to holiday pay calculations, employers should also seek legal advice if they have any doubts over compliance.