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Significant case ruling published – calculating holiday pay

The subject of how to calculate holiday entitlement and pay for workers who work irregular hour’s part year, has been back and forth through the courts since 2015. It reached the Supreme Court back in November, and we have been waiting for the judgement ever since.

Today, we now have further clarity, but there does remain some practical questions.

This is a long-standing and complex case and we have set out below the timeline of the issue as it was dealt with through the various employment courts.

What is the case about?

Under the Working Time Regulations (WTR), a worker is entitled to 5.6 weeks of paid annual leave.

This case, which has progressed through the Employment Tribunal, Employment Appeal Tribunal (EAT), Court of Appeal and the final stage of the Supreme Court, looks to establish whether a worker on a continuous contract, is entitled to holiday entitlement for a full year, when working only part year.

The circumstances

Ms Brazel works as a music teacher on a zero-hour contract, which means she does not have a set number of working hours. She is given her working hours based on the demand for music lessons and is paid an hourly rate. She is paid monthly, which is calculated based on the number of hours worked in the previous month.

Up until 2011, Ms Brazel, received more holiday than she was entitled to under the Working Time Regulations because the Harpur Trust did not designate parts of the school holidays as statutory leave (i.e. the 5.6 weeks) and made three payments in lieu of holiday for each full term – December, April and August.

As a result, this provided Ms Brazel with more paid annual leave than she was entitled to because she was receiving paid annual leave for around 13 weeks a year (schools generally get about 13 weeks off during the year), rather than the statutory 5.6 weeks.

In 2011 the school changed how they managed calculating holiday entitlement for those who work irregular hours and moved to the 12.07% method which was the Government and Acas guidance at the time.

The guidance was brought in because the WTR do not contain any provision for those who do not have normal hours, i.e., set hours throughout the year even though they are also entitled to 5.6 weeks of annual leave a year, just like a full-time worker is.

However, by doing so, this resulted in Ms Brazel receiving a lower amount of holiday pay than she had been used to receiving and she brought a claim for unlawful deductions from wages on the grounds of there being an underpayment of her entitlement to holiday pay.

What was the 12.07% method?

This method was introduced as guidance because every worker is entitled to 5.6 weeks of paid annual leave each year and there needed to be a way of working out what someone would get who worked irregular hours.

You will find that 5.6 weeks of paid annual leave is equivalent to 12.07% of hours worked over a year.

Therefore, by using a percentage that you know is the same as the statutory entitlement, it was thought that you could calculate someone’s leave based on their actual hours worked. Helpful, when those hours are irregular.

By using a percentage of 12.07%, the employer would then pay the normal hourly rate for that holiday as and when taken. Therefore, limiting Ms Brazel’s holiday entitlement to an equivalent of 5.6 weeks of paid annual leave, proportionate to the number of hours she worked each month.

12.07% is the equivalent of 5.6 weeks, because:

  • 52 weeks minus 5.6 weeks = 46.4 weeks
  • Divide 5.6 by 46.4
  • Multiply by 100 to get the percentage
  • = 12.07%

Using 12.07% meant that an employer would pay the normal hourly rate for that holiday as and when taken.

Tribunal stages

Employment Tribunal

The employment tribunal was heard in 2015 and found in favour of the Harpur Trust and agreed that the 12.07% method was lawful because it gave Ms Brazel proportionally the same holiday entitlement as a full year worker.

Employment Appeal Tribunal (EAT)

In 2018, the EAT court overturned the original ET ruling and found in favour of Ms Brazel saying that there was no reason to depart from the plain statutory language of the WTR and that the intention of the WTR is that all workers are entitled to 5.6 weeks of paid annual leave and there was no basis for pro-rating someone’s entitlement.

Ms Brazel should therefore receive holiday entitlement calculated across a 52-week reference period rather than only for hours worked part year meaning that the ’12.07% method’ was an unlawful interpretation of the working time regulations.

The ruling concluded that to use the 12.07% method would mean that a worker would suffer a detriment, which is unlawful under the Part Time Worker Regulations.

However, in this approach it would mean those who work part year would receive favourable treatment over full time workers, however, the judgement ruled that there is nothing within the Part Time or Working Time Regulations to say favourable treatment is not allowed.

Consequently, both the Government and Acas removed their guidance of using the 12.07% method.

Court of Appeal

The Harpur Trust took the case to the Court of Appeal in 2019. They argued that using the 12.07% method was necessary to avoid unjust results. They also claimed that for Ms Brazel to not use the 12.07% resulted in her receiving a much higher proportion of her actual earnings than if she worked full year.

This meant, Ms Brazel receiving an equivalent of 17.5%, not 12.07%, which is the percentage someone who worked full year would receive.

The Harpur Trust lost the appeal and the court ruled that even though Ms Brazel was better off to someone who worked full year, she was entitled to 5.6 weeks of holiday and her holiday pay should not be limited to 12.07% of her salary.

Ultimately, they ruled that even if it meant the favourable treatment of part year workers, that was not an issue if it aligned to the worker’s minimum rights under the Working Time Regulations.

The judgement can be found here.

The Supreme Court

The Harpur Trust appealed the Court of Appeal’s decision which was heard in November 2021 and the judgement was published July 2022.

The Judgement

The Supreme Court dismissed the Harpur Trust’s appeal.

This is a significant ruling as it sets out the legal principles for calculating holiday entitlement and pay for workers who work irregular hours, part year. It does not relate to those who work on fixed term contracts, or those who work regular part time hours each week.

It now means, that for those workers on a continuous contract who work irregular hours and part year are legally entitled to the full 5.6 weeks paid annual leave and for it not to be prorated. The 12.07% method for calculating pay is unlawful.

So for example, what this ruling means (assuming the employee is permanent, not in their first or last year of employment, receives statutory holiday only):

  • Workers on part year continuous contracts are entitled to the full 5.6 weeks paid annual leave, regardless of working less than a full year.
  • This has created a discrepancy between this type of worker, and one who works regular weekly part time hours, because for the latter, they will have their 5.6 weeks entitlement prorated based on the hours they work.
  • This ruling also does not affect the ability to pro rata holiday when someone is employed on a fixed term contract, in their first or last year of employment.

What next?

We are currently assessing the practical and legal implications of this ruling as we believe it could have implications for other types of contracts, not just those on term time contracts.

As we interpret this ruling and the practical implications for employers, we recommend employers start to carry out a review of their employees current situation regarding holiday entitlements and holiday pay, in terms of how it is currently calculated.

Further analysis to be published soon….

How can we help?

If you would like any support and guidance in conducting your review, or to seek advice on the risks for your business arising from this judgement, please contact us or call  0844 324 5840 to speak to a member of the team.

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