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Tags: case update, holiday pay
Categories: Employment Law
No, says the Supreme Court in Harpur Trust v Brazel (available here).
The way in which a week’s pay is calculated for those workers with no normal working hours is set out at s224 of the Employment Rights Act 1996 (ERA). This says that a week’s paid leave is calculated based on average weekly pay over a 52-week reference period immediately before the holiday (or a 12-week reference period prior to April 2020).
This is known as the ‘calendar week method’. The pay reference period only includes weeks for which the worker was actually paid. Weeks for which the worker was not paid are ignored and earlier weeks are brought forward instead (including up to 104 weeks before the holiday).
However, this requires a complex calculation and can result in a worker receiving a disproportionate amount of holiday pay compared to their hours spent working. A simpler approach is to say that these workers accrue statutory paid holiday entitlement at the rate of 12.07% hours worked (‘the percentage method’). This is because the standard working year is 46.4 weeks (i.e. 52 weeks minus 5.6 weeks leave) and 5.6 weeks is 12.07% of 46.4 weeks. This means that for each hour worked, the worker accrues just over seven minutes paid holiday entitlement.
Unfortunately this approach conflicts with the WTR. This is because the percentage method allows accrual based on hours worked, whereas accrual under the WTR is based on length of time engaged and is only applicable during the first and final years of employment.
The pitfalls in this approach have been highlighted by this case, in particular in respect of ‘part-year’ workers. These are workers who only work during certain weeks of the year, but who have a permanent contract for the whole year. For example, those who work term-time only or on a seasonal basis.
Facts: Ms Brazel was engaged by The Harpur Trust (the Trust) to work at Bedford Girls’ School, as a visiting music teacher. Ms Brazel was engaged on a permanent employment contract that continued for the whole year. However, she worked term-time only and had no normal working hours. She was paid monthly at an agreed hourly rate for the hours she had worked in the previous month.
Ms Brazel was required to take her 5.6 weeks’ paid leave during the three school holidays which the Trust paid for in three equal payments. These were calculated by using the percentage method (I.e. by multiplying Ms Brazel’s agreed hourly rate by 12.07% of her total hours worked during the previous term).
Ms Brazel considered that she was effectively receiving less than 5.6 weeks’ paid leave and brought a deduction from wages claim in the Employment Tribunal. She said that the Trust should not use the percentage method which conflicted with the WTR. She should instead be paid for the full 5.6 weeks’ leave using the calendar week method under s224 ERA.
The Trust argued that paid holiday entitlement should be pro-rated depending on time spent working.
The Tribunal dismissed Ms Brazel’s claim, but the EAT and Court of Appeal both agreed with her.
The Supreme Court dismissed the Trust’s appeal.
Using the percentage method was not compliant with the WTR. If Ms Brazel worked fewer hours in a particular term, she would accrue less holiday, and this would reduce her entitlement to below 5.6 weeks per year. Every worker, including part-year workers, should receive at least 5.6 weeks paid holiday for each year they remain engaged on a permanent contract. This entitlement should not be based (or pro-rated) on hours worked and pay should be calculated using the calendar week method under s224 ERA (ignoring non-working weeks).
The Supreme Court acknowledged that this could lead to a windfall for some part-year workers. In fact, the greater the number of non-working weeks, the greater their paid holiday entitlement will be.
For example, an exam invigilator is engaged by a school on a permanent (year-round) employment contract to work three weeks per year (at 40 hours per week). She earns £700 per week. She is entitled to 5.6 weeks’ holiday per year. Pay for a week’s leave will be £700 (as all non-working weeks are ignored). She will be entitled to £3,920 holiday pay (5.6 x £700) which is more than she receives for the time she works.
However, despite this, and the fact that part-year workers would likely receive proportionately more holiday pay than full-time workers, the Supreme Court said this was method was correct under the WTR.
Implications: This is not good news for employers who use the percentage method to calculate holiday pay. There is no further appeal process and (unless the government changes the law) holiday pay for workers who only work part of the year should be calculated using the calendar week method. This is likely to be disproportionately expensive.
Although on the face of it, this decision only affects those part year workers who have permanent year-round contracts, it is also likely to affect other workers. For example, a casual (or zero-hours) worker who has an ‘umbrella’ contract (whereby individual assignments are connected by a continuing contract).
Fundamentally, the Supreme Court has rejected the percentage method in favour of the rules set out in the WTR. These only allow for accrual of holiday entitlement (in the first and last years) based on time spent engaged by the employer (not hours worked) and for pay to be calculated using the calendar week method under s224 ERA.
The best way to reduce holiday pay when using the calendar week method is to ensure that workers have only a few (or no) non-working weeks, as this reduces average weekly pay. This can be achieved by spreading the workload to ensure that some work is performed every week. You could otherwise use a short-term contract to only cover the period of an individual assignment. The additional benefit of a short-term contract (for under one year) is that the WTR allows holiday to accrue, rather than provide an automatic entitlement to 5.6 weeks. A further alternative is to engage contractors who are genuinely self-employed and have no holiday entitlement.
Even if you decide to continue to use the percentage method, limiting the number of non-working weeks is key to reducing the risk of underpayments. To check the gap in the amount of holiday pay between the percentage, and calendar year, methods, you could perform a regular reconciliation calculation (e.g. quarterly). If there is a gap you can make up the difference by an additional payment to the worker to avoid any underpayment.
The good news is this decision should not affect part-time workers who have normal working hours throughout the year; or those who work term-time only, but are paid in 12 equal monthly instalments. These workers are likely already paid in compliance with the WTR, as they continue to be paid their normal salary during their 5.6 weeks of holiday.
Unfortunately, if you do (or have) used the percentage method you may face claims for unlawful deductions from wages (which can be brought within 3 months of the last underpayment or termination). These can include up to two year’s back pay from the date of the claim.
You should be prepared for pressure to recalculate holiday pay and reimburse any underpayments and to explain to workers who receive normal salary for holiday pay, why they are to be paid proportionally less for their holidays than a part-year worker. The fact that this disproportionate outcome is, in fact, legal is unlikely to stop such workers feeling aggrieved.
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