The facts
Mrs Brazel was a music tutor based at Bedford Girls School, which was operated by the Harpur Trust. She was engaged under a contract in which she was only required to work during school terms, and her hours each week during term-time would vary, depending on the needs for her lessons. As a “part-year” worker, she remained employed from year to year, but was contractually only required to work at certain periods during each year.
Under her original terms, she was provided with 5.6 weeks paid holiday each year, which was deemed to be taken and paid in three equal parts of 1.87 weeks during the Summer, Christmas, and Easter school holidays. The amount of holiday pay for each part was based on her average weekly pay for the preceding 12 weeks she worked before each holiday period (“the calendar week method”).
From September 2011, her holiday pay calculation was changed to the “percentage method”. Her total holiday entitlement, as well as holiday pay, was directly based on how many hours she had worked in the preceding 12 weeks. As is common for other employers, the Trust calculated the total hours Mrs Brazel worked in the preceding term, and added 12.07% of those hours in respect of holiday. Holiday pay was based on her average pay for the preceding 12 weeks she had worked. The 12.07% uplift for holiday, as is often used for employees with irregular hours, is essentially the proportion that 5.6 weeks of holiday bears to a total working year of 46.4 weeks (i.e. 52 weeks less 5.6 weeks taken as holiday).
Mrs Harpur raised a claim for underpayment of wages, being her holiday pay entitlement, for the period from January 2011 to June 2016. Whilst her claim was rejected by the employment tribunal, her case was upheld by both the Employment Appeal Tribunal and Court of Appeal. The Supreme Court considered these issues in November 2021, and judgment was given on 20 July 2022.
The judgment
The critical finding of the Supreme Court was that the percentage method of calculating holiday entitlement for “part-year” workers did not comply with the Working Tim Regulations 1998. All workers, regardless of their working hours, and regardless of the proportion of each year they work, have a statutory entitlement of 5.6 weeks each year. This entitlement is not reduced on a pro-rata basis if they work part of each year of employment. Consequently, the Supreme Court found that the calendar week method previously applied by the Trust was correct, as it ensured she received her full 5.6 week holiday entitlement each year, regardless of the number of hours she worked.
In contrast, the 12.07% method meant that if she worked fewer hours in a particular term, her holiday entitlement was reduced to below her 5.6 week entitlement. Whilst the Supreme Court acknowledged that the calendar week method meant that part-year workers would receive disproportionately more holiday entitlement than full-year workers, the wording of the Working Time Regulations were clear, and could not be interpreted as reducing below the 5.6 week minimum holiday entitlement.
It is important to distinguish part-year workers to part-time workers. A part-time worker, as well as part-year workers, will still be entitled to 5.6 weeks holiday, but their entitlement in days or hours will translate into a proportion of a full-time equivalent’s entitlement. For example, a 0.5FTE worker will be entitled to 50% leave of that of the FTE. But this worker is still entitled to 5.6 weeks leave, so each week of leave will be 50% of the FTE worker’s week of leave. If a FTE worker works 5 days per week, their 5.6 weeks entitlement will be 28 days. A 0.5FTE worker’s 5.6 weeks entitlement will be 14 days.
A part-year worker is also entitled to 5.6 weeks, even though they may work a fraction of the year, during each year of employment. Extreme examples could result in employees who only work 1 month each year being entitled to 5.6 weeks’ further holiday pay each year.
Implications
This decision clearly has direct relevance to sectors which use part-year employees who are retained on a year round basis, such as education, agriculture, hospitality and tourism. It will also generally impact irregular work contracts, as many employers use the 12.07% method as a relatively easy way of calculating holiday entitlement and pay where employees are engaged intermittently on short-term assignments, and have gaps of varying duration between assignments throughout the year. The real risk for these workers is that the overall holiday pay paid to them during each year under this method falls below 5.6 weeks of their average weekly pay based on a statutory 52-week reference period (discounting periods of non-working).
Employers need to urgently review their holiday entitlement calculations for irregular hours workers with gaps between assignments who use the 12.07% method, and identify the shortfall in holiday pay paid under this method, against the holiday pay entitlement based on their weekly average pay multiplied by 5.6 weeks.
Any underpayments in holiday pay are likely to be brought as unauthorised deduction from wages claims, which must be brought within 3 months of the last underpayment of holiday (subject to extension in time limits for ACAS early conciliation). Liability for underpayments can go back 2 years from the date any claim is issued.
Employers are also likely to face arguments from outgoing employees that their accrued but unused holiday pay entitlement on termination of employment is increased to take into account the underpayment of holiday pay using the 12.07% method, and which is not limited to 2 years but from the start of employment or their statutory entitlement to 5.6 weeks, whichever is later.
New holiday pay arrangements in compliance with the Working Time Regulations therefore need to be put in place in consultation with the relevant employees to limit any further liability for underpayment of holiday, with the potential of having to negotiate and settle claims for back payments of holiday pay.
More generally, this case may also prompt employers to:
- review their use of part-year and irregular workers, potentially by engaging them on discrete fixed-term contracts only for specific assignments without any expectation for further employment, and with a payment of accrued holiday pay for the duration of the fixed-term contract only on termination.
- convert irregular employees to being paid a lower fixed salary throughout the period of employment, including during periods of non-working, based on anticipated working hours over the course of the year, to ensure any holiday entitlement and pay liability is met.
- engage irregular workers as self-employed contractors, potentially through intermediary entities, to lower the risk of any liability to pay holiday pay.
If you have any questions about this case and its implications, or need help to review your contracts and holiday pay policies, our Employment team can help. Get in touch at d.sheppard@capitallaw.co.uk for an initial chat.
