What do we already know?
We updated you in our March 2018 Newsletter Case update (2): Happy holidays! Pay for term-time workers that the EAT had decided in Brazel v The Harpur Trust that holiday pay for staff who work irregular hours should be calculated using the standard 12-week reference period required under the Working Time Regulations (WTR), rather than on the basis of 12.07% of annual pay.
The employer appealed to the Court of Appeal.
The Court of Appeal has upheld the EAT’s decision that holiday pay should not be calculated on the basis of 12.07% of hours worked for permanent staff with irregular hours, but instead should be based on an average of earnings in the 12 weeks before leave is taken.
In the Court of Appeal’s judgment in Brazel v The Harpur Trust, available here, the Court rules that the common practice of applying a cap of 12.07% of annualised hours, as suggested by ACAS, is incorrect.
Background: Under the WTR, workers are entitled to 5.6 weeks’ paid holiday. This right comes from the EU Working Time Directive, which provides for a minimum of four weeks’ paid annual leave. Under the WTR, workers who work irregular hours (such as casual, bank or zero hours workers) should be paid holiday pay calculated by reference to the average pay over the previous 12 weeks before the calculation date (which is the first day of the relevant period of leave) excluding any weeks in which no remuneration is payable. This is to be increased to 52 weeks from 6 April 2020.
The ACAS booklet “Holidays and holiday pay” (available here) recommends that for staff working on a casual basis or very irregular hours, holiday pay should be calculated as 12.07% of annualised hours, on the basis that the statutory annual leave entitlement of 5.6 weeks represents 12.07% of a working year of 46.4 weeks (i.e. 52 weeks minus 5.6 weeks). This method effectively caps a worker’s holiday pay to 12.07% of annual earnings with the effect of pro-rating holiday pay entitlement for “part-year” workers (such as term-time only workers).
Facts: Mrs Brazel was a part-time music teacher, retained on a zero-hours contract. She worked mostly during term-time and her hours fluctuated weekly. She had a contractual right to 5.6 weeks’ paid holiday, mirroring her statutory right, and she was required to take this holiday during school holidays.
Mrs Brazel was paid holiday pay based on 12.07% of the actual hours worked each term at the end of the term. She received holiday pay three times a year in her March, August and December pay packets. This approach was based on the ACAS guidance on holidays and holiday pay for casual workers and avoided a “windfall” for term-time workers as their non-working weeks would be taken into account and their holiday pay pro-rated. However, it did not follow the methodology used by the WTR i.e. calculating holiday pay based on her average rate of pay over the 12 weeks prior to holiday being taken.
Ms Brazel argued that she lost out with this method of calculation as it produced a lower figure than that required by the rules in the WTR. She believed that holiday pay should be calculated by taking the average weekly remuneration for the 12 weeks prior to the calculation date and multiplying it by 5.6. She calculated that this would give her holiday pay of around 17.5% of her earnings for the term and brought a Tribunal claim on this basis.
The Employment Tribunal rejected Ms Brazel’s claim and agreed with her employer that a part-time worker who works for only part of the year should have their holiday entitlement pro-rated to reflect the weeks they actually work. Otherwise, a term-time worker could receive a higher percentage of annual earnings as holiday pay than an employee who worked throughout the year. This would be unfair to full-time workers.
Mrs Brazel appealed to the EAT, which overturned the Tribunal’s decision on the basis that it does not comply with the methods required by the WTR. The EAT instead held that holiday pay should be calculated by using the 12-week averaging method which applies under the WTR where workers have no normal working hours.
The EAT did not consider there to be a requirement to pro-rate the leave entitlement of part-time employees, whether to avoid a “windfall” for term-time only workers or to avoid full-time employees being treated less favourably than part-timers.
The employer appealed to the Court of Appeal, which upheld the EAT’s decision. Whilst stating “it may at first sight seem surprising that the holiday pay to which part-year workers are entitled represents a higher proportion of their annual earnings than in the case of full-year workers”, the Court of Appeal went on to say that it was not persuaded that this was unprincipled or obviously unfair. It said that the WTR make no provision for pro-rating and simply require the straight-forward exercise of calculating a week’s holiday pay by averaging the last 12 weeks’ pay. In terms of holiday entitlement itself, the Court of Appeal said that while ECJ case law did appear to establish that workers should only accrue holiday entitlement in proportion to the time that they work, this approach was not mandatory and, as member states are able to provide more favourable entitlements, there was no requirement to pro-rate the entitlement of part-year workers to that of full-year workers.
Implications: When calculating holiday pay for employees who do not have regular hours of work, whether they are term-time workers or any other irregular working pattern, the correct approach is to work out the average pay in the 12 week period prior to the holiday being taken (only including weeks when an individual is working and ignoring weeks when the worker is on holiday or on unpaid leave).
Note that from April 2020, the appropriate reference period will be 52 weeks.
In light of this judgment, employers who have historically pro-rated the holiday entitlement and pay of workers who do not have normal working hours (e.g. because they do not work throughout the year) should now take steps to review their current calculations and determine whether adjustments might now be appropriate.
Unfortunately, simply paying 12.07% annualised hours as holiday, or increasing hourly rates by 12.07%, to include an element for holiday pay (‘rolled up holiday pay’) may produce the wrong result for employees and may leave you vulnerable to claims for unlawful deductions from wages.
The good news is that the decision should only affect employees engaged under permanent contracts who work for part of the year (including term-time only workers, seasonal workers and those on zero hour contracts). The decision does not directly comment on zero hours (or other casual staff) who are not retained by their employer between periods of work.
It remains to be seen whether this case will be appealed to the Supreme Court. It is probably not going to be seen as important enough, but we will of course update you if it does happen.