Holiday pay bonanza?

The recent Supreme Court decision in the case of Harpur Trust v Brazel has changed the way that statutory holiday pay is calculated for some individuals who only work part of the year. The biggest impact is likely to be on businesses engaging workers or employees on an overarching permanent contract but who have a number of unpaid non-working weeks during the leave year.

This may impact businesses in the food industry where part-year arrangements are common to meet seasonal demands. You should consider whether these workers are exposed to any potential shortfall in holiday pay due to the method used to calculate it.

Facts

Ms Brazel was employed as a music teacher at a school run by the Harpur Trust (the Trust). She was employed by the Trust under a permanent zero hours contract, working term time only for variable hours each week. For large parts of the year, Mrs Brazel did no work for the Trust at all. Ms Brazel was entitled to a minimum of 5.6 weeks’ paid holiday each year under the Working Time Regulations 1998 (WTR), which she was required to take during the school holidays. An issue arose over the way in which Ms Brazel’s holiday pay was calculated.

From September 2011, the Trust changed its holiday pay calculation method in line with the Acas guidance at the time for calculating holiday pay for casual workers. The Acas guidance stated that the statutory entitlement of 5.6 weeks’ leave is equivalent to 12.07% of the hours worked over a full year, based on working the whole year. The Trust calculated the number of hours worked by Ms Brazel each term, then took 12.07% of the total and paid Ms Brazel for those hours as her holiday pay at the end of each term. She claimed that by adopting this method of calculating her holiday pay, the Trust was underpaying her.

Ms Brazel brought a tribunal claim for unlawful deductions from wages. She argued that her holiday pay should be calculated by averaging her pay over the period of 12 weeks immediately preceding her holiday, ignoring any weeks in which she was not paid. This is the method for calculating a week’s pay under the Employment Rights Act 1996, which is referenced by the WTR. Her claim was initially dismissed by the employment tribunal, but upheld by both the Employment Appeal Tribunal and, in 2019, the Court of Appeal.

The Court of Appeal held that the holiday pay entitlement for a permanent employee working part of the year (term time only), should not be pro-rated to reflect the fact that she only worked for part of the year.

The Trust appealed to the Supreme Court.

Supreme Court

The issue for the Supreme Court to decide was whether part-year workers’ leave entitlement should be calculated as a proportion of the entitlement of full-time employees (meaning that the weeks that they do not work reduce their entitlement), or whether their leave (and pay) must be calculated ignoring those weeks. The latter, which the Supreme Court decided unanimously was the correct approach, would leave them with an entitlement which proportionally exceeds that of other employees.

The Supreme Court has therefore unanimously dismissed the Trust’s appeal, upholding the decisions of the EAT and Court of Appeal.

The Supreme Court considered itself bound by the provisions for the calculation of holiday pay under the WTR. There is no requirement under the WTR to pro-rate holiday entitlement for part-year workers, to make it proportionate to that of a full-time worker. It dismissed the Trust’s argument that calculating holiday pay in this way would lead to an ‘absurd result’ whereby those working part-year only would receive a proportionately higher amount of holiday pay than those working regular full or part time hours. In the Court’s view, a slight favouring of workers with a highly atypical work pattern is not so absurd as to justify a wholesale revision of the existing statutory scheme, as would have been required by the Trust’s preferred calculation methods.

The Birketts View

Since 6 April 2020, the calculation of a week’s pay under the Employment Rights Act 1996 changed from an average of 12 to an average of 52 weeks’ pay, still excluding any weeks in which no remuneration is payable. The ACAS guidance on calculating holiday pay was amended following the Court of Appeal’s decision in this case, and now makes reference to the averaging method for those workers without regular hours.

Who does this case apply to?

The biggest impact is likely to be on businesses engaging workers or employees on an overarching permanent contract but who have a number of unpaid non-working weeks during the leave year. This is common in the food sector where part-year arrangements are used to meet seasonal demands. For example, you may employ permanent seasonal staff for fruit picking or harvest, as well as permanent restaurant staff who only work intermittently during busy periods. Workers engaged on discrete, fixed term contracts are less likely to be able to rely on this decision as they will not have lengthy periods of time where they are under contract but not in receipt of any pay, meaning that their holiday is less likely to be underpaid.

Therefore, if you have staff under a permanent contract but they work short of a full year, or if you use the 12.07% method for casual workers on permanent contracts and are concerned that you are exposed to underpayments of holiday pay, then it might be sensible to review your contracts and consider your options.

Looking to the future

It is likely that we will see further unlawful deductions claims in the employment tribunal as a result of this decision, particularly from workers who have had their holiday pay calculated using the 12.07% method and can show that this results in an underpayment. We wait to see how tribunals/courts will apply the Supreme Court decision in practice to the calculation of holiday pay more generally for casual workers.

It will be for Parliament to decide whether or not to make any amendments to the legislation in light of the Supreme Court’s decision. This is highly unlikely to happen any time soon, although many legal commentators would agree that the WTR are long overdue an overhaul.