On Wednesday 20 July 2022, the Supreme Court in the UK passed a ruling which declared that part-year workers (these are workers on permanent contracts who only work part of the year, for example in term-time) are entitled to the same holiday pay as full-time workers. As is often the way with cases involving holiday pay, the judgment has since been the cause of much confusion and concern. It has left many employers wondering where they stand in respect of holiday pay going forward and what they should do to make sure they are paying holiday pay correctly.
What elements of paid annual leave does the judgment actually cover?
The first thing to clarify here is what the judgment does not apply to and that is a worker’s entitlement to annual leave. In the UK a worker’s entitlement to annual leave is treated separately to their holiday pay. This is important as this judgment only applies to the calculation of holiday pay and a worker’s entitlement to annual leave has not changed. In fact, it is the separate treatment of holiday pay and holiday time that has led to this situation.
Under the Working Time Regulations 1998 (WTRs), a worker is entitled to 5.6 weeks of time off in the year. For a part-time worker that allowance is pro-rated in proportion to the time they work. This pro-rating also applies to shift-based workers, or those who are on zero-hour contracts and critically also covers those who only work part of the year. On that basis, every worker is treated consistently and is entitled to the same amount of leave in the year.
However, the judgment relates to how workers have been paid for that annual leave and ultimately comes down to the different methods that employers have historically used to calculate holiday pay, these were predominantly the calendar year method and, in the alternative for workers with atypical arrangements, the percentage method.
What is the calendar year method?
The calendar year method is the method for calculating holiday pay set out in the WTRs. Taking it at the most basic level, it means that a worker’s entitlement to holiday pay is one week’s pay for each week of leave. For full-time workers and part-time workers with consistent hours, a week’s pay is straightforward to calculate, as in both cases their pay for one week will be the same irrespective of what week of the year you’re looking at. However, for workers who work irregular hours or have weeks of the year when they are not working at all, calculating a week’s pay under the calendar year method is much more complicated.
The WTRs originally set out a method for calculating holiday pay for workers with atypical arrangements, which calculated a worker’s average weekly pay over a reference period of 12 weeks before the date a worker takes annual leave, this was called the pay “reference period”. However, from 6 April 2020, the reference period was extended to 52 weeks before the date a worker takes their annual leave. The WTRs also confirm that any weeks in which no pay was received should be excluded from the reference period and instead, the calculation will need to go back further than the reference period (i.e. into the prior year if needed) to the last time the worker was paid in order to calculate 52 weeks’ worth of pay. In the event a worker has not been with an employer for more than 52 weeks, then under the calendar year method, you would take an average based on the time they have been working.
Why did employers want to use an alternative method for calculating holiday pay?
The calendar year method created an issue for the Harpur Trust (as well as many other employers). This was essentially because for a term-time worker like Ms Brazel, disregarding any time during the reference period for which she was not paid, meant they would have to go beyond the reference period to establish what one week’s salary actually was. This meant that for anyone with atypical hours, calculating their holiday pay could be incredibly complicated. In addition, the worker’s holiday pay may not have accurately reflected the hours they actually worked prior to their annual leave and could even place part-year workers in the position that they were receiving the same holiday pay as their colleagues who worked the whole year. This is because their holiday pay would be calculated using the 52-week reference period, which in effect means their holiday pay would be calculated on the basis of a full year of work, even though they may have only worked, as in Ms Brazel’s case, 32 -35 weeks of the year.
What is the percentage method?
Many employers, (in line with Acas guidance at the time) adopted the percentage method of calculating a worker’s holiday pay rather than using the much more complicated calendar year method. This was particularly the case for employers who had a large number of workers working irregular hours or workers on zero-hour contracts. The percentage method capped a worker’s holiday pay at 12.07% of the hours they worked. This was calculated on the basis that a standard working year is 46.4 weeks and 5.6 weeks of the year would be 12.07%. The idea being this would pro-rate a worker’s holiday pay based on their actual hours worked to ensure that they were treated consistently with full-time workers or part-time workers with consistent hours over the year.
On its most basic analysis, why did Ms Brazel bring a claim against the Harpur Trust?
In accordance with the Acas guidance at the time, in 2011 the Harpur Trust decided to adopt the percentage method instead of the calendar year method and capped Ms Brazel’s holiday pay at 12.07%. This meant that Ms Brazel was paid less for her annual leave. As a result of which, Ms Brazel brought a tribunal claim for unlawful deduction of wages. Her argument was that her holiday pay should have been calculated using the calendar year method as set out in the WTRs. She also argued that the percentage method was directly contrary to the method put forward by the WTRs and that employers had no legal basis for applying the percentage method in place of the calendar method set out in the WTRs.
What was the Supreme Court’s decision?
The Supreme Court unanimously agreed with Ms Brazel that the calendar week method, as set out in the WTRs, should be applied for workers with atypical hours as well as full time workers or part-time workers with consistent hours throughout the year. The Supreme Court noted that this would place part-year workers like Ms Brazel in a slightly better position than her whole-year colleagues but confirmed that any advantage received by workers with atypical working patterns was not “so absurd as to justify the wholesale revision” of the WTRs. Put another way, it was not worth changing the entire statutory regime for what is likely to be only a minimal number of workers being slightly overpaid for their holiday.
So, who does this judgment actually impact?
Critically, this judgment from the Supreme Court does not affect full-time workers or part-time workers who work consistent hours across the entire year. This judgment will actually only affect those workers who work part of the year or potentially workers on zero-hour contracts. Particularly, this is likely to impact academic institutions where many staff, for example, don’t work over the summer or during holiday periods but are contractually engaged on a permanent full-time basis. Similarly seasonal workers who are engaged on a permanent contract (or for an entire year) but are only required to work part of that year, will also be caught by this judgment.
What do employers need to do going forward?
The first step will be ensuring that, if you aren’t already, you’re calculating holiday pay for all workers based on the calendar week method rather than the percentage method. Then, in the event that you have been using the percentage method for part-year or zero-hour workers, you may want to consider calculating the holiday pay you should have paid them for the past 2 years and repay them those sums. This is because any worker bringing a claim for unlawful deduction of wages (on the same terms as Ms Brazel brought her case) can claim losses for the previous 2 years and it is possible, that coverage of Ms Brazel’s claim will bring the potential for such claims into the public eye. Although, employers can take some comfort from the fact that a worker can only bring such a claim for 3 months after the last deduction, so in the event corrections are made swiftly going forward, there is only a limited time during which a worker can bring a claim.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
