Calculating holiday leave and pay for atypical workers has always been a complex topic.
Previously many organisations ‘rolled up’ holiday pay for such workers meaning that they received enhanced salary instead of leave, but this was ruled unlawful following a decision of the Court of Justice of the European Union in 2006.
Prior to the Supreme Court Judgment in Harpur Trust v Brazel, it was generally accepted that holiday pay for these workers could be calculated based on hours actually worked. As employers may not know in advance how many hours the worker will work during the year (especially for zero hour workers) there was a tendency to apply a percentage of 12.07% when calculating holiday entitlement and pay on the understanding that workers accrued leave throughout the year based on hours already worked. The 12.07% equates to 5.6 weeks of the total 46.4 working weeks in a year (working weeks being 52 weeks minus the 5.6 weeks spent on holiday). This approach was endorsed by ACAS at the time.
However, the Supreme Court Judgment in Harpur Trust v Brazel has changed this position and employers who use this method will now have to reconsider this.
The Supreme Court Judgment
The Claimant in this case was a music teacher engaged on a permanent contract. She worked different hours each week during the school term depending on how many students needed lessons. She did not work during the school holidays and was only paid for the hours she worked.
She did not take leave during the school term and was instead required to take her leave during the school holidays (which, it was not disputed, was an acceptable practice). There were three school holiday periods and so 1.87 weeks of each of the school holidays were treated as leave for which she was paid. She was paid initially based on a reference period of 52 weeks but this later changed and she was paid as per the percentage principle above.
The Supreme Court held that the Claimant’s holiday entitlement was not dependent on the hours she actually worked and that she was entitled to 5.6 weeks leave. A week’s pay for this purpose was to be calculated on the basis of average pay over the preceding 12 week reference period (since 6 April 2020 this reference period has been increased to 52 weeks). The usual rules apply regarding the reference period i.e. that any weeks in which the worker did not work are ignored and earlier weeks taken into account instead (subject to a cap of 104 weeks).
The Supreme Court found that there was nothing in the Working Time Regulations indicating that alternative methods of calculating pay should be used for these part-year workers. It said that Parliament had clearly envisaged pro-rating pay for someone who starts, or finishes, part way through the year (as this is provided for in the legislation) but that these were the only circumstances allowing for any pro-rating.
It recognised that there may be situations where this approach may result in absurdities (such as a worker who works only three weeks of the year being entitled to holiday each year of almost twice their annual hours/income) and that an interpretation of the law that leads to an absurd result would unlikely be what Parliament intended. However, it said that a ‘slight favouring of workers with a highly atypical working pattern’ was not so absurd as to justify the ‘wholesale revision of the statutory scheme’. It further stated that ‘general rules sometimes provide anomalies when applied in atypical cases...’
Where does this leave employers?
Although this case was about term-time working, it will have implications for many types of atypical working arrangements where workers are engaged on permanent contracts but work varying hours during only certain weeks of the year.
The ACAS guidance has been rewritten in light of this case and BEIS guidance also makes it clear that the ‘percentage’ approach should not be used. Employers using such methods will now need to reconsider these.
Unfortunately, the Supreme Court did not deal with some of the tricky matters resulting from this, such as how to calculate holiday pay in circumstances where less than a week is taken where the worker works irregular hours.
Employers will now need to review and reconsider the arrangements in place for these atypical workers and whether it is practical for them to continue or whether alternative models, such as temporary contracts, would be preferable. There will need to be a move away from the percentage approach towards the 52 week average in terms of pay but it is likely further advice will be needed to assist with this transition given the variety of atypical working arrangements in place and, in particular, the complexities in dealing with those with irregular hours.
Workers who have been underpaid will be able to bring unlawful deduction of wages claims. There may be arguments for employers in respect of such claims (particularly if there have been significant gaps between holiday payments) and claims for backpay may be limited to two years but these could still have significant costs implications for organisations, particularly if they are brought by a number of workers.