Holiday pay calculations for part-year workers could be about to change again – here’s why

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How do you calculate holiday pay for permanent workers with no set hours such as ad-hoc, zero hours or term time workers? It’s a question that’s plagued and puzzled both employers and employment lawyers for years but one which will hopefully be definitively answered shortly by the Supreme Court in its long-awaited decision in the landmark case of Harpur Trust v Brazel.

For a permanent worker working a regular pattern throughout the year, calculating holiday entitlement and pay is straightforward. It’s far trickier to calculate where you can’t predict, what, if any, hours will be worked in a given week or month.

You might be familiar with the 12.07% method – it’s an easy formula for employers to apply, but it’s not always accurate or, some would argue, fair. In fact, the Court of Appeal in Harpur Trust v Brazel found that the practice was unlawful.

That case has now made its way to the Supreme Court for a final decision on whether the widely used and understood 12.07% approach is incompatible with the Working Time Regulations 1998 (WTR) . And depending on the outcome, it may continue to be unlawful for employers to apply that approach.

Naturally, the consequences are wide-reaching, and employers are confused. Whilst some employers made changes to their practices following the Court of Appeal’s decision, others have waited to hear the Supreme Court’s take on it. In fact, 40% of employers we polled said they would have to change to their current practices, and a further 26% said they weren’t sure.

With a decision expected imminently, here’s what you need to know ahead of time in order to get prepared.

The math: Full-year versus part-year workers

The WTR give workers the right to 5.6 weeks’ holiday per year – that is every 52 weeks.

For ad-hoc, zero hours and term-time workers, it’s long been common practice for employers to calculate holiday pay as 12.07% of hours worked.

This calculation comes from taking the 52 weeks in a year and subtracting the statutory 5.6 weeks to give 46.4 actual working weeks. From there, 5.6 weeks’ holiday out of 46.4 possible working weeks works out at 12.07% of hours worked.

Boiling it down, this means for every hour worked, roughly seven minutes of holiday is accrued.

The problem with using this ‘percentage of time worked’ approach for part-year workers is that when no hours are worked in a week, no holiday is accrued, so accrual sometimes falls short of the statutory minimum entitlement under the WTR.

This is particularly problematic where there are whole weeks in which no work is done, as is the case for sessional workers such as teachers.

Harpur Trust v Brazel: A recap

The case that brought all of this to the forefront is Harpur Trust v Brazel, which was first brought before the Employment Tribunal in 2015.

The Claimant, Ms Brazel, was a “visiting music teacher” with no set working hours, employed under a permanent contract of employment.

Typically, the school year comprised 32 weeks; Ms Brazel wasn’t required to work during the school holidays and no part of them were expressly designated as her statutory holiday entitlement.

As per its policy, the Trust worked out Ms Brazel’s holiday pay by establishing her earnings at the end of a term, calculating 12.07% of that figure, and then dividing it by three (reflective of the three school terms).

Consequently, Ms Brazel brought a claim for unlawful deduction from wages. She argued the Trust’s method meant she received less in holiday pay than she was due under the WTR, and that there was nothing in the WTR to say that holidays for part-year workers should be subject to a pro-rata reduction.

At first instance, the Employment Tribunal dismissed her claim. It held that applying the 12.07% formula gave Ms Brazel the pro-rated equivalent of a full-year worker.

The case continued through the Tribunal system; Ms Brazel appealed to the EAT and was successful, and the Trust subsequently appealed to the Court of Appeal.

The core issue to be determined was whether the calculation of the Ms Brazel’s holiday entitlement or holiday pay should be pro-rated to that of a full-year worker in order to reflect the fact that she does not work throughout the year.

The Trust certainly thought so. It argued that part-year workers’ entitlement to leave accrued in step with hours worked, and that individuals like Ms Brazel should receive less than a full year’s entitlement otherwise they received a windfall.

Indeed, Ms Brazel’s proposed method of calculation – explained in more detail here – would mean she received proportionally more in holiday pay than a full-year worker, equivalent to 17.5% of hours worked as opposed to 12.07%. Surely that wasn’t what Parliament intended?

The Court of Appeal accepted that not applying a pro-ration did produce peculiar results. For instance, it would mean that an individual on a permanent contract who only worked for one week would be entitled to receive 5.6 weeks of leave and pay. Still, that didn’t deter the Court from finding in Ms Brazel’s favour.

It felt that these odd results would be rare given that most workers wouldn’t be permanently employed if they were only required to work one week. Further, it didn’t agree with the Trust that it was unfair to place Ms Brazel and others like her at an advantage when compared to full-year workers given that both were permanent workers and her holiday pay would vary according to her actual working pattern.

The case was heard by the Supreme Court in November 2021 with a judgment awaited.

What method should employers be using the meantime?

In dismissing the appeal, the Court of Appeal concluded that employers needed to do a straightforward exercise of identifying a week’s pay in accordance with the provisions of sections 221 to 224 of the Employment Rights Act 1996 and then multiply that figure by 5.6.

But that doesn’t necessarily mean that part-year workers are entitled to 28 days’ annual leave as would be the case for a full-time, full-year worker. The Court stressed that the actual days from which a part-year worker will be relieved from working (i.e. on holiday) and the amount of their holiday pay will reflect their actual working pattern. Read more about this here.

Crucially, this finding means that the WTR do not support the use of the 12.07% formula in the case of part-year workers, so continuing with that approach carries the risk of unlawful deduction from wages claims.

Employers who are currently using the 12.07% method are left with two options: wait it out in the knowledge that their current practice is unlawful in the hope that the Supreme Court overturns the Court of Appeal’s decision and supports the use of the 12.07% formula, or make changes now and risk jumping the gun if the judgment does go in employers’ favour and permits the use of the 12.07% going forward.

Until we have clarification from the Supreme Court, it’s difficult to know what to do. In fact, according to our recent poll, 20% of employers said they would need to update their practices but are awaiting a final decision first, and a further 20% weren’t even aware of the Court of Appeal’s decision. Just 5% said they had already changed their practices.

Once the Supreme Court has spoken, is that the end of the story?

Whether the Supreme Court’s decision supports a return to the 12.07% formula so widely used by employers remains to be seen, but it will at least provide employers with some much-needed clarity and certainty as to how they should calculate holiday accrual and pay for permanent term-time, ad-hoc or zero hours workers going forward.

However, undoubtedly some confusion will remain, as the Court of Appeal’s decision focused on permanent workers; it didn’t deal with casual workers engaged under a series of discrete contracts. It’s hoped that the Supreme Court’s decision will shed some light on how employers should approach holidays for these types of workers, as if not, holiday pay headaches could continue for some time to come.

Youmanage enables you to calculate entitlement automatically, including pro-rata for part-time employees, saving you and your team valuable time and ensuring calculations are correct and compliant.

If you’re still relying on home-built systems and complicated spreadsheets that are taking up valuable time and could be leaving your organisation exposed, why not try a free 30-day trial, or book a free demo with our Support Team for more information.