Holiday pay for part-year workers should not be pro-rated, says Supreme Court

The Supreme Court has ruled that paid holiday entitlement for workers who only work part of the year should not be pro-rated to reflect the fact that they don’t work for the whole year. The 12.07% method used by many employers to calculate the holiday pay of casual workers is not the correct method to use.

All workers in Great Britain have a right to 5.6 weeks’ paid holiday each year under the Working Time Regulations 1998 (WTR). This is straightforward to calculate in the case of full-time workers who work five days a week for a fixed salary, but it is much more difficult in the case of workers with no normal working hours.

This case is about how holiday leave and pay should be calculated for workers who work varying hours during only certain weeks of the year but have a contract throughout that year (part–year workers). These workers do not work the full number of hours worked by full-time workers or the full number of weeks worked by part-time workers. So how should holiday leave and pay be calculated for them?

The key question the Supreme Court had to consider is whether the holiday entitlement of part-year workers is calculated on the same principle, proportionately, as for full-time workers, which would mean that the weeks they do not work reduce their entitlement, or whether their holiday is simply based on all the weeks for which they are under their contract of employment (i.e. including weeks where they don’t actually have any work). Taking the latter approach would mean they would have a holiday entitlement of 5.6 weeks a year, regardless as to how many weeks they had actually worked. The way that pay is calculated for holiday may then mean that they receive higher holiday pay than employers may have otherwise expected.

What do the holiday pay rules say?   

Under the WTR, holiday pay is calculated using the complicated rules in the Employment Rights Act 1996. These rules say that holiday pay for a worker with no normal working hours (a “casual worker”, or “zero hours workers”) is based on their average pay over a 52-week reference period immediately before the holiday. At the time of this case, the reference period was 12 weeks. The WTR say that you ignore any weeks when the individual received no pay (i.e. you disregard weeks where they did no work), and so earlier weeks need to be taken into account in the reference period where the individual did work and did receive pay.

To simplify things, many employers have used the 12.07% method to calculate holiday entitlement for workers with no normal working hours. Under this approach, the worker accrues holiday entitlement at the rate of 12.07% of hours worked. This accrual rate comes from the fact that the standard working year is 46.4 weeks (that is, 52 weeks less the statutory 5.6 weeks holiday entitlement) and 5.6 weeks is 12.07% of 46.4 weeks. This method means that workers accrue holiday entitlement in the same proportion to the hours they work as other workers. The individuals are then simply paid at their normal contractual rate for that holiday. This approach was recommended by Acas in guidance on calculating holiday pay for casual workers which has since been withdrawn, but it is not included in the WTR. The employer in this case had used this method.

What happened in this case?

Mrs Brazel was a visiting music teacher at a school run by the Harpur Trust. She was a worker engaged on a permanent contract on a zero-hours basis. She worked a variable number of hours providing music tuition to children during weeks in term time and did not work full-time or for the whole year. There were no minimum hours guaranteed to Mrs Brazel. She was paid an agreed hourly rate of pay each month for the hours she worked in the previous month.

As a worker, under the Working Time Regulations, Mrs Brazel was entitled to 5.6 weeks’ paid annual leave each year, which she was required to take during school holidays when she was not teaching. No particular weeks were designated as statutory holiday, but Harpur Trust made three equal payments in respect of holiday at the end of each term. That is to say, 1.87 weeks of each of three school holidays was treated as holiday for which Mrs Brazel was entitled to be paid.

Previously, the Trust calculated Mrs Brazel’s holiday pay by working out how much she had been paid in the 12 term-time weeks before the school holiday (as 12 weeks was the reference period that applied at the times relevant for this claim), divided that total by 12 and paid her 1.87 times that weekly average.

However, in September 2011, Harpur Trust changed how it calculated holiday pay. Instead of using the averaging method which it used previously, it calculated Mrs Brazel's earnings at the end of each term and paid her one-third of 12.07% of that figure. She earned less holiday pay under this method than the averaging method which was used before.

Mrs Brazel brought a claim for unauthorised deductions from wages in the Employment Tribunal, which was decided in favour of the Trust, but on appeal both the EAT and Court of Appeal decided in Mrs Brazel’s favour. Harpur Trust appealed to the Supreme Court.

What did the Supreme Court decide?

The Supreme Court essentially stated that:

• Firstly, a part year worker should receive the normal 5.6 weeks' holiday per year – that holiday should not be pro-rated because they are under contract for the whole year. Mrs Brazel should therefore receive 5.6 weeks' holiday per year (and the way that the Harpur Trust had been calculating holiday was wrong – because she was not receiving this 5.6 weeks’ holiday).
• Secondly, the method of calculating pay for that holiday should be to use the averaging method (i.e. taking the worker’s average pay over the 52 week period before the holiday - or 12 weeks at the time of the claim in line with the rules that applied then), ignoring any weeks that had not been worked.

The Supreme Court rejected both of the alternative calculation methods suggested by Harpur Trust including the 12.07% method but also another method known as the ‘Worked Year’ method. This method involves calculating the proportion of a "full" working year of 46.4 weeks that comprises weeks in which the worker does actually work. 

The Supreme Court said that both these methods were contrary to the statutory calculation method set out in the Working Time Regulations.

The impact of this is that Mrs Brazel and casual workers who do not work every week will ultimately receive an uplift in their holiday pay. Whilst the Supreme Court noted this, they did not accept that it should affect their interpretation of the law, albeit that they did note it was an absurd position which may justify wholesale revision of the Working Time Regulations.

What does this mean for employers?

This is an important case in the long line of holiday cases. It means that workers under ongoing contracts are entitled to 5.6 weeks' holiday each year regardless of the amount of work done. They must then receive pay for those weeks calculated on the 52 weeks averaging method, disregarding weeks where no work is carried out.  This will increase holiday pay for certain individuals and it will increase the costs for employers. The 12.07% method of calculating holiday has been rejected by the Supreme Court.

This case affects workers without normal working hours (so those who are casual workers / zero hours workers). This case should not affect those working part-time (or full-time) with set hours throughout the year e.g. someone working 3 days a week. Their holiday can still be calculated as a reduced number of days compared to a full-time worker because this will still result in them getting 5.6. weeks’ holiday at their normal rate of pay.

To provide an example of an issue for employers, take a person who is on a contract throughout the year but only actually works for one month of the year. Except in the first year of their contract where holidays accrue each month at the rate of 1/12^th of the annual entitlement, that person is now entitled to 5.6 weeks’ paid holiday, and their holiday pay disregards all the weeks where they have not worked.  That provides them with a windfall in relation to holiday pay as compared to someone who is only actually on a contract for that one month’s work.

To help address these issues, employers engaging workers on part-year, casual or zero hours permanent contracts may wish to review their contractual arrangements and consider alternatives. For example, considering using temporary contracts which terminate at the end of each assignment instead, with no ongoing contract following that; or only engaging individuals on permanent ongoing contracts where they are going to be carrying out work every week. However, from other cases and from issues around different contractual arrangements we know that there will be drawbacks and issues to consider in these approaches.

Employers who use the 12.07% method to pay holiday to their casual workers on permanent contracts should re-visit that approach and consider how they will deal with this new case.

Harpur Trust vs Brazel