Case Law Update: Paid Holiday Entitlement

The Supreme Court has upheld the Court of Appeal's judgement on the Harpur Trust v Brazel case.

The ruling states that holiday pay for permanent staff who only work part of the year, such as term-time workers, should get a full 5.6 weeks of annual leave a year. Pay should be calculated over a 52-week average, rather than on a basis of 12.07%. The same principles apply to zero-hour workers, those on variable-hours or casual contracts.

This case has gone all the way from the employment tribunal to the Supreme Court. So, we’ve broken it down so you can skip to exactly where you want to go in the article:

• Employment law relevant to this case
• Facts of the case
• What the ET found
• What the EAT found
• What the Court of Appeal found
• What the Supreme Court found
• Key takeaways for employers

If you don’t have time to go through the entire blog, you can always see our too long; didn’t read the section here.

Finally, you can download a breakdown of how the case will affect your business, and how you calculate holiday entitlement and pay here.

With all of that out of the way, let’s get to the facts…

Employment law relevant to this case

Article 7 of the EU’s Working Time Directive (WTD) outlines that workers in Member States should be provided at least four weeks of paid annual leave in one leave year. In Great Britain, the Working Time Regulations 1998 (WTR) provide workers with a minimum of 5.6 weeks of paid annual leave. The Regulations dictate that workers should be paid at the rate of a week’s pay in relation to each week of leave.

If workers do not have normal working hours, section 224 of the Employment Rights Act (ERA) outlines that a week’s pay should be determined by averaging their weekly pay over the previous 12 weeks. For the purposes of holiday pay, the WTR tells us to instead use 52 weeks, rather than 12.  (In 2018 regulation 16 of the WTR was amended by The Employment Rights (Employment Particulars and Paid Annual Leave) (Amendment) Regulations 2018 which inserted a 52-week reference period into regulation 16 (3) (e)).

Acas previously advised that workers in this situation should accrue paid holiday entitlement at a rate of 12.07 per cent of hours worked. This figure was calculated by taking 5.6 weeks away from 52 weeks to find the standard working year of 46.4 weeks. 5.6 weeks is 12.07 per cent of 46.4 weeks.

This was the position at the time of the original ET and EAT case, however subsequent to the Court of Appeal decision in this case, this has now been updated, and new guidance in 2020 was issued by the Department for Business, Energy and Industrial Strategy (Holiday Pay - Guidance on calculating holiday pay for workers without fixed hours or pay) (“the BEIS Guidance”).  This instructs employers not to: 

(1) include in the holiday reference period any whole week in which no payment was received, and

(2) apply the Percentage Method (i.e. 12.07%)

The example given in the BEIS Guidance helpfully sets the position out:

“a part-time music teacher has a zero-hours contract entitling them to 5.6 weeks annual leave. They have a term-time contract meaning they work 32 weeks per year but remain in employment for the full year. They must take their 5.6 weeks of annual leave during the school holidays. They should therefore be paid for 5.6 weeks of leave taken at some point during the school holidays. The school breaks up for the summer holidays on Friday 25 July and the teacher decides to take a two-week paid holiday in mid-August before school returns on 10 September. The employer should therefore take an average of the teacher’s pay rate over the last 52 weeks in which they worked, starting with the last week at the end of the summer term and omitting any other periods of school holiday in which the teacher was not paid.”

Harpur Trust v Brazel

Facts

The claimant in this case operated as a music school teacher. As part of a zero-hours part-year contract, she worked at a school on a regular basis and was only paid for the work she carried out. Generally, she worked for around 32 hours per week. The school year provided more holidays than the statutory minimum. As a result, her paid holiday entitlements were calculated by:

• Assessing her earnings at the end of each of the three school terms
• Working out one-third of 12.07% of that figure

The school believed that this was in keeping with guidance from Acas. (note the facts of this case arose before the Acas guidance was updated).

The claimant argued that this system did not comply with the provisions of the WTR. Therefore they did not provide her with the holiday pay that she was entitled to.

If you apply the calculation as it is outlined in section 224, her holiday pay works out very differently. Assuming she did work 32 weeks on leave year her holiday would be 17.5% of her total annual salary.

What the Employment Tribunal (ET) found

The claimant brought a claim to the ET for unlawful deductions from wages. The tribunal dismissed her claim. They found that the school had calculated her holiday pay correctly by applying the pro-rating principle.

What the Employment Appeal Tribunal (EAT) found

The claimant appealed to the Employment Appeal Tribunal (EAT), which ruled in her favour. They found that section 224 provided a simple method of calculating pay for irregular workers.

In forming their decision, the EAT held that part-time workers could not be treated any less favourably than full-time workers. However, they found that the WTR did not provide any requirement for pro-rata holiday pay for part-time employees, even if it was to ensure that full-time employees were not treated any less favourably.

What the Court of Appeal found

The organisation appealed to the Court of Appeal. They argued that it was necessary to reduce the claimant’s holiday entitlement to avoid unjust results.

For example, if the employee in question was provided holiday pay at 17.5%, it would result in other zero-hour contract workers being entitled to significant holiday pay. In some cases, the holiday pay would exceed that of full-time staff.

The Court of Appeal dismissed this appeal. The Court first identified the claimant as someone who did not work throughout the year. Therefore, they were a ‘part-year worker’. They went on to outline that the WTD only requires workers to accrue annual leave in proportion to the time they work. The Court labelled this as an ‘accrual approach’. However, this does not apply to the remuneration for that leave. And so, the WTD places no requirement on member states to pro rata leave entitlements of ‘part-year workers’ to that of ‘full-year workers’.

Turning to domestic law, the Court acknowledged that the ruling may seem surprising. However, the fact that part-year worker holiday pay could represent a higher proportion of their annual earnings than full-year workers was not ‘unprincipled or obviously unfair’. The important factor to consider was that part-year workers are on permanent contracts. Therefore, it wasn’t unreasonable to treat that as a sufficient basis for fixing the quantum of holiday entitlement.

The Court did accept that this ruling could lead to odd results in ‘extreme cases’. Overall however it concluded that it would be unusual for an individual who only worked a few hours a year to be on a permanent contract.

The Supreme Court (SC) ruling

The SC has upheld the judgment of the Court of Appeal in this matter.

The rejected the methods proposed by the employer. They held that a method is already set out in the Employment Rights Act for the calculation of a week's pay. Using other methods, such as the "percentage method" above, were not in line with parliamentary policy.

This was based on the absence in the WTR of a method to calculate pro-rata leave for those still employed but not required to work every week of the year. As the SC pointed out, parliament included a method to calculate pro-rata leave when an employee begins or ends their employment during an annual leave year. The omission of a means to do this for those that work on part-year ongoing agreements was clearly therefore deliberate.

It was accepted that this could at times have an extreme effect. For example, an exam invigilator who only works for 2 weeks in a year could, if permanently employed, get a full 5.6 weeks’ holiday. However, it was felt that this would be such an unusual situation it is unlikely to impact many employers. In any event, there was no obligation for full time workers to be treated more, or less, favourably than part-year workers.

The judgement concludes, summing up the findings, as follows: 

“In short, the amount of leave to which a part-year worker under a permanent contract is entitled is not required by EU law to be, and under domestic law is not, prorated to that of a full-time worker.”

Note for employers

This is an important case for any employer calculating holiday pay for atypical workers. The key takeaway from this judgement is that all workers (note, this includes employees) should be getting 5.6 weeks leave. It doesn’t matter how many weeks in the year they work. What is crucial is:

• That their contract is ongoing
• That they are not required to work every week of the year
• That their holiday pay should be based on an average over 52 weeks in which they have performed work

This means employers will need to ensure they keep accurate records, so as to be able to calculate this average. It is especially important to note that only weeks in which work is performed should be included. Weeks where no work is provided, but the contract continues, should not be included. This may mean going further back than one year (to a maximum of 104 weeks). 

Moving forwards, employers may need to reconsider their use of permanent zero-hours contracts. Consider whether other types of contract or working arrangements are more suitable, such as fixed-term working or providing more regular work. 

TL;DR

A school teacher worked regularly at a school on a zero-hour part-year contract. The school worked out her paid holiday entitlement by assessing her earnings at the end of school terms and working out one-third of 12.07% of that figure. The teacher took the school to a tribunal as they believed this wasn’t in line with the working time regulations.

The ET dismissed her claim. The EAT ruled in her favour. The school appealed this decision to the Court of Appeals. They believed that they must reduce their teacher’s holiday entitlement so these workers wouldn’t be entitled to holiday pay that may exceed that of full-time staff. The Court of Appeal dismissed their appeal. The case was taken to the Supreme Court.

The Supreme Court agreed with the Court of Appeal. Nowhere in EU or UK law did it state that holidays should be pro-rated for those who do not work every week of the year. It did not matter that this would give more holiday to these workers than those working all year.  

This is a significant ruling, so it is worth reviewing your contracts and your policies on paid holiday entitlement. A 52-week average must be used to calculate holiday pay and part-year workers are entitled to 5.6 weeks of holiday, not pro-rated.

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