What can HR learn from a recent ruling on holiday pay?

William Downing outlines implications for employers of the Supreme Court’s decision on paid holiday entitlement for part-year workers

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In Harpur Trust v Brazel, the Supreme Court upheld the Court of Appeal's ruling in 2019 that both holiday entitlement and holiday pay for ‘part year’ workers on permanent contracts (with irregular hours), could not be reduced pro-rata to reflect the actual hours worked during the year

Accordingly, such workers must now receive the full statutory minimum 5.6 weeks' paid holiday entitlement per year, and their pay for this holiday must be based on the ‘calendar week method’ of a week's working hours averaged over a 52-week period using weeks where they were actually paid.

Ms Brazel was a music teacher employed on a permanent zero-hours contract who worked irregular hours during the school year. The Harpur Trust calculated her holiday pay entitlement at the end of each term as 12.07 per cent of the hours she worked in the preceding term. This figure was based on 5.6 weeks equating to 12.07 per cent of a working year (52 weeks less 5.6 weeks) – the ‘percentage method’.

Brazel argued that the Harpur Trust should apply the calendar week method; ie, the ‘week’s pay’ calculation set out in the Employment Rights Act 1996 using a 12-week average (now a 52-week average). This would have resulted in higher holiday pay. 

Although the calendar week method might produce a more favourable outcome for workers with an atypical work pattern (compared to permanent, full-time staff or part-time staff on regular hours), the Supreme Court considered this did not justify a wholesale revision of the statutory scheme, which was drafted by parliament. It was not for the Harpur Trust or the court to devise another method.

Who will be impacted?

This judgment will affect any employee/worker employed every day across the year yet not paid for the full 5.6 weeks' statutory holiday. All such workers must receive 5.6 weeks' minimum holiday and be paid for it. Specifically, the ruling applies to the holiday pay for employees/workers who are engaged on a permanent contract, who work irregular hours and who only work part(s) of the year.

Those who work part of the year or term time only but whose hours are regular, including part-time workers with regular hours, should remain straightforward. Their holiday pay for the 5.6 weeks' holiday can be calculated using their normal working hours under the contract. Remember that commission, bonuses and regular overtime could be included. Term-time workers' holiday is often spread through the whole year – if it is not, their paid holiday entitlement may fall short. 

Non-permanent contracts with breaks will mean calculating holiday pay at the end of the assignment. But be wary if there are repeat assignments, because courts can determine overarching/umbrella contracts to link the periods of work.

The decision particularly affects the education sector where thousands of school staff are employed on term-time only contracts – for example, music or sports teachers with irregular hours. However, the decision is also highly significant for employers who engage staff on permanent zero-hours or irregular hours contracts, such as in retail, hospitality and leisure, where they only work part of the year. 

What should employers look out for?

Organisations should check how they have been calculating holiday pay for ‘part year’, permanent, irregular-hour workers to see if corrections need to be made and consider whether they may face employment tribunal claims. They will need to review and (if necessary) amend their contracts of employment and payroll processes.

Strategically, employers may also want to review whether such workers should be given permanent contracts, depending on how key that individual is for part of a year's work.

Businesses need to be aware of the risk of claims if they continue to use the percentage method calculation and be mindful that a ‘series’ of unlawful deductions from wages claim could go back up to two years. Because of the Court of Appeal decision in Smith v Pimlico Plumbers earlier this year, employers could also have difficulties defending a ‘series’ of unlawful deductions claim on the basis that the ‘series’ of underpayment of holiday pay has been broken by a gap of more than three months. In Smith, the Court of Appeal expressed the “strong provisional view” that the three-month gap rule was not correct. 

Organisations can still of course determine when holiday is taken (for example, during school holidays) and will still use the worker's hourly rate of pay when paying for holiday. However, employers that also have variable rates of pay will have the additional burden of working out the correct hourly rate to apply.

For more details of how to calculate holiday pay for workers without fixed hours or pay there is comprehensive government guidance. This was updated to take account of the EAT and Court of Appeal decisions in Brazel. 

Beyond the increased monetary cost of bringing affected workers up to the full 5.6 weeks' holiday entitlement, it’s also worth employers considering the possible resentment that may be engendered from regular hours staff who see their colleagues get increased holiday pay in periods they are not working anyway – so this should be managed with care and tact.

Perhaps most importantly for employers, this ruling now brings clarity to this complex issue, after several years of uncertainty since the Brazel litigation commenced.

William Downing is a partner in the employment law team at Blake Morgan