Statutory minimum holiday pay cannot be pro-rated for part-year staff

Supreme Court: all workers are due 5.6 weeks’ paid annual leave no matter how many weeks they work.

Working out holiday leave and pay for workers with variable hours is a tricky business. Over the years, employers have used short-cuts to try to ensure that zero hours and variable hours staff are getting their holiday pay. For example, paying staff an additional 12.07% of pay for each hour worked. The problem with these kind of short-cuts is that they are far removed from the way the law works and can lead to workers not receiving their leave entitlement, or the correct pay for that leave.

Statutory minimum holiday leave

It is important to understand that the law on holiday leave and the law on holiday pay are different.

Taking holiday leave first, the Working Time Regulations (WTR) provide for 5.6 weeks’ minimum paid leave per year. The contract may provide a more generous entitlement to paid leave, but this is a statutory floor below which holiday entitlement for workers and employees cannot fall.

Holiday pay: a week’s pay for a week’s leave

The WTR states that workers should be paid a week’s pay for a week’s leave. It is the Employment Rights Act 1996 which sets out the rules on working out what is meant by a week’s pay. Broadly, there are two different ways in which a week’s pay is calculated.

For those with normal working hours, a week’s pay is simply what the worker earns if they work their normal hours in a week. (Although this has been complicated by case law which means that any regular payments made on top of pay for normal hours should also be included in holiday pay.)

For those with no normal hours, or whose pay varies because of the amount of work done, or the time when it is done, a week’s pay is the average of remuneration paid over a reference period. This was previously 12 weeks before the date of the holiday leave. Since 6 April 2020, the reference period has been extended to the 52 weeks before the leave is taken. In working out the average, no account is taken of weeks during which no work is done and the employer must go as far back as 104 weeks to find the last 52 working weeks. Where the worker has not worked for the employer for that long, the average should be calculated from all their worked weeks to date.

The problem with the 12.07% calculation

12.07% is commonly used to calculate holiday entitlement and/or pay for variable hours workers. It is a holiday accrual rate and comes from the following calculation: 5.6 weeks’ leave divided by the number of working weeks in the year (52 – 5.6 = 46.4).

This percentage may be accurate to calculate holiday leave entitlement, but only where a worker has statutory minimum leave and works for all of the other weeks in the year.

The problem with this calculation is that it is inaccurate if there are weeks during the year when the worker is not working and is not on holiday. For example, a worker who has 5.6 weeks’ holiday entitlement but works only 30 weeks during the year should have the following leave accrual rate:  5.6 divided by 30 = 18.67%.

Rolled up holiday pay

Paying an additional amount on top of pay each month for holiday pay (known as “rolled up holiday pay”) is not compliant with the way paid leave works under the WTR. This is because holiday pay should be paid at the time leave is taken rather than effectively being paid in lieu during the contract.

The reason for this is that the fundamental purpose of the European Working Time Directive, which the WTR implemented in the UK, is to protect the health and safety of workers. Paying rolled up holiday pay can disincentivise workers from taking leave, as they do not actually have to take leave to receive holiday pay.

Case details: Harpur Trust v Brazel

We reported on the Court of Appeal’s judgment in this case in 2019. For details of this please see How should holiday pay be calculated for term-time only workers? (available on our website). 

Mrs Brazel is a term-time only visiting music teacher on a zero hours contract. She is paid holiday pay three times a year and designated leave days in each school holiday period. Her leave entitlement was worked out at 12.07% of hours worked and paid at her hourly rate.

Mrs Brazel brought a claim for unlawful deductions from wages to an employment tribunal. She argued that she was owed 5.6 weeks’ paid holiday, without pro-rating, and that the trust should have used the statutory reference period to work out her average weekly pay. She calculated that her leave accrual rate should have been about 17.5% and that she had been underpaid by around £235 per term.

The Supreme Court decision

The Supreme Court handed down its judgment on 20 July this year. The key points clarified in the judgment are that:

• all workers who are on contract throughout the holiday year are entitled to the statutory minimum of 5.6 weeks’ paid annual leave under the WTR – this minimum entitlement cannot be pro-rated to reflect the number of weeks worked; and
• to work out holiday pay, average weekly pay should be calculated over the statutory reference period just prior to leave being taken (discounting all non-worked weeks).

Implications for employers

Mrs Brazel’s case particularly applies to part year workers on a year-round contract who have no normal hours. These are workers who have some unpaid non-worked weeks each year. That could include seasonal, term-time only and zero hours contract staff on ongoing contracts who have some weeks each year where they are neither working nor  on holiday.

This case has not changed the law on holiday leave and pay. It simply clarifies the existing law and highlights that the practice of applying 12.07% of additional pay to account for holiday pay for variable hours workers is likely to be non-compliant with the WTR.

This case is the end of the litigation process and the law on this point is now settled. The law will only change if parliament legislates to do so in future.

Claims for unlawful deductions from wages must be brought within 3 months of the last in a series of deductions. Where a correction is made, workers will usually not be able to bring an employment tribunal more than 3 months after that correction. There is also a backstop of two years on arrears which can be claimed as unlawful deductions from wages.

Employers should review their current contracts and holiday entitlement calculations to determine whether their practice is compliant with the law. We recommend that employers seek legal advice to assist with assessing risks and making changes to leave and pay calculations going forward.

How Wrigleys can help The employment team at Wrigleys is expert in advising charities, third sector and education sector clients on employment tribunal claims, including those relating to holiday leave and pay. We also have extensive experience in helping employers to review and update contracts and policies so they are compliant with current law and best practice. We offer timely, pragmatic advice to reduce the risk of conflict and complaints. We also regularly assist with the defence and resolution of employment tribunal claims. Importantly, we work within the wider charities, social economy, and education teams at Wrigleys and so we also have in-depth understanding of how our clients’ governance and regulatory obligations impact on employment litigation risks. Our CSE team can further help to minimise your risks by providing advice on charity law, trustee and director duties and delegation of powers, reporting to the regulator, and reputational risk.

 

If you would like to discuss any aspect of this article further, please contact Alacoque Marvin or any other member of the employment team on 0113 244 6100. You can also keep up to date by following Wrigleys employment team on Twitter The information in this article is necessarily of a general nature.  The law stated is correct at the date (stated above) this article was first posted to our website. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.