Government publishes new consultation on calculating holiday for part-year and irregular hours workers

In January, the government launched a consultation on proposals to deal with the calculation of holiday entitlement for workers who work for only part of the year (such as schoolteachers and teaching assistants who only work during term time) or work irregular hours following the decision of the Supreme Court in Harpur Trust v Brazel last year.

In a nutshell…

In the case of Harpur Trust v Brazel, the Supreme Court ruled that the 5.6 weeks’ annual leave entitlement under the Working Time Regulations 1998 (WTR) should not be reduced pro rata for “part-year workers” –  those who are employed for the whole year but only work some weeks and not others.

Facts

Mrs Brazel was a music teacher employed by the Harpur Trust on a permanent contract on a zero hours basis. She worked variable irregular hours each week during term time as her hours of work fluctuated based on the demand for lessons from students.

Mrs Brazel took her holiday in three equal tranches at the end of each term. Originally, the Trust calculated her holiday pay for each tranche based on her average weekly pay for the previous 12 weeks (ignoring those weeks where she did not receive pay). However, in September 2011, the Trust changed the way it calculated Mrs Brazel’s holiday pay and adopted the “12.07% method”.

The 12.07% is used by a number of employers and it is calculated by taking a working year of 46.4 weeks (52 weeks less 5.6 weeks annual leave), with 5.6 weeks’ being 12.07% of 46.4 weeks. This produced a less favourable result for Mrs Brazel than the previous calculation.

Mrs Brazel brought a claim and the case ended up in the Supreme Court. In short, the Supreme Court confirmed that part-year workers should not have their holiday pay pro-rated.

Calculating holiday pay for workers with irregular hours

The Working Time Regulations state that a full-time worker is entitled to 5.6 weeks’ paid holiday. The amount of pay for that holiday depends on the average weekly pay. For workers with no normal working hours, holiday pay is calculated based on the average earnings of a 52-week reference period (this increased from 12 weeks from 6 April 2020). Any week in which the worker did not get paid is ignored.

What is clear from the Supreme Court’s decision is that employers can no longer calculate holiday pay for workers with irregular working patterns using the 12.07% method.

Following this decision, for permanent workers with irregular hours, holiday pay should be calculated by looking at the hours of work that worker has undertaken across a 52-week reference period, discounting the weeks in which the worker did not receive any pay, then calculating their average week’s pay across the 52-week period, and then multiplying it by the 5.6 weeks’ annual leave entitlement.

This means that part-year workers should not have their holiday entitlement pro-rated. This has the potential to produce some bizarre results. For example, an employee who only works one week per year but is on a permanent contract may be entitled to only one week’s pay for the work completed, but could be entitled to 5.6 weeks’ holiday pay.

Implications

This judgment will impact the holiday pay calculation for workers on permanent contracts who have irregular working patterns where their pay corresponds to those working patterns. As such, only workers with no normal working hours and who are paid on an hourly or daily basis will be impacted. The decision is not limited to part-year workers only and would also apply to part-time workers with no set hours (i.e. zero-hours workers).

Those staff paid a salary each month, whose pay is the same regardless of whether they are working or on holiday, and those staff who are not retained by the employer between periods of work are not currently affected by this decision.

The Supreme Court acknowledged that the calendar week method could result in part-year workers receiving more of their earnings as holiday pay than full or part time workers on regular hours.

Our Advice

Employers now need to assess how to deal with these issues moving forward, starting by reviewing current holiday practices to ensure they comply with the judgment (and adopting the correct holiday pay calculation going forwards if they do not). We would also advise you consider undertaking a review to establish what workers you have on permanent contracts but with irregular hours, who could be impacted by the judgment. This should help quantify potential exposure to date.

It is also worth employers considering whether to move away from engaging workers on permanent contracts with irregular hours. For example, an employer may wish to engage workers on fixed-term contracts for a specific period of time to avoid this issue. Alternatively, they might want to look at engaging individuals on a self-employed/freelance basis if the work to be undertaken is short and irregular.

Currently the 12.07% calculation may still be used for casual workers who are not retained by the employer between periods of work. However, following this latest judgment employers may again come under pressure to recalculate holiday pay, and pay underpaid holiday to any workers where the 12.07% method gives a less favourable result.

Backdated Claims

There is a potential for backdated claims. It is worth noting that a worker seeking to bring an unlawful deduction from wages claim only has three months beginning with the date of the latest deduction to bring such a claim. Where there have been a series or chain of deductions (i.e. regular underpayment of holiday), a claimant can usually only claim up to a maximum of two years from the date of the most recent deduction. Where there has been a gap of more than three months between deductions, the chain will be broken.

New Government Consultation

The consultation refers to an anomaly caused by the Brazel decision, namely that it results in part-year workers being entitled to a larger holiday entitlement than part-time workers who work a consistent number of hours across the year. The consultation is focused on addressing this disparity and seeks views on the introduction of legislation to ensure holiday entitlement and pay is proportionate to time worked.

The government’s proposals include the following:

1. The introduction of a 52-week reference period for calculating holiday entitlement for part-year and irregular hours work. The reference period would include the most recent 52 weeks including weeks when the worker does not work. This differs from the current reference period for calculating holiday pay which is the last 52 weeks for which remuneration was paid (including weeks where the worker is not working but is on paid sick leave or annual leave). The reference period for holiday pay may therefore go back further than the most recent 52 weeks.
2. Use of the 52-week reference period for holiday entitlement to calculate the number of hours in an average working day to determine how many hours a days’ leave should be.
3. A fixed reference period so that a part-year or irregular hours worker’s holiday entitlement would be calculated at the beginning of the leave year based on hours worked in the previous leave year. This would give workers and employers certainty over holiday entitlement in a leave year but if the worker’s hours increase in the new leave year the entitlement will not be proportionate to the new increased hours.
4. In the first year of employment (during which holiday entitlement is pro-rated), accrual of holiday entitlement would be calculated at the end of each month based on the actual hours worked.
5. The introduction of bespoke rules for agency workers, possibly calculated at the end of the month as 12.07% of hours worked in that month.

The consultation will close on 9 March 2023.