In January 2023, the government launched a consultation with the aim of overturning the effect of the Harpur Trust Judgment. Whilst no law changes have been confirmed yet, it’s likely there will be some change to the way the holiday is calculated for part-year and irregular-hours workers.
What is the Harpur Trust v Brazel Case?
Brazel (the employee) was employed as a visiting music teacher on a permanent zero-hours term-time contract. This means she would only work during school terms (typically 32-35 weeks per year) and was not guaranteed minimum hours; her working time varied depending on the needs of the school pupils she taught instruments to.
Brazel was given 5.6 weeks’ annual leave which had to be taken during the school holidays. Since the school holidays are longer than the 5.6 weeks’ holiday entitlement, the Trust did not designate any particular parts of them as statutory leave. Instead, it made three payments in lieu of holiday in respect of each term, in December, April and August.
ACAS guidance at the time suggested that, for workers with irregular hours, holiday entitlement could be calculated as 12.07% of hours worked.
This was on the basis that 5.6 weeks is equivalent to 12.07% of hours worked over a year (5.6 weeks’ holiday, divided by 46.4 weeks (being 52 weeks – 5.6 weeks) multiplied by 100 = 12.07%) (the “12.07% Method”).
The Trust adopted the 12.07% Method, which had the effect of Brazel receiving a smaller sum in respect of her holiday pay than she would have done if holiday pay had been calculated by taking an average of her weekly earnings over the previous 12 weeks (the method set out in current legislation). It is worth noting the reference period for calculating average weekly pay increased from 12 weeks to 52 weeks in April 2020.
As such, she brought a claim before the Employment Tribunal for unlawful deductions from wages by underpayment of holiday pay. The claim went through the ranks of the tribunal system before eventually reaching the UK Supreme Court, which gave a final decision.
Why was the case so important?
The case questioned the lawfulness of using the 12.07% Method to calculate holiday pay and leave entitlement.
It also questioned whether holiday leave entitlement can be pro-rated for people who don’t work every week of the year. This would include those on a zero-hours, variable-hours, casual, agency or term-time contract. Together, these can be categorised as a “part-year” worker
What is the difference between a part-year and a part-time worker?
A part-year worker is anyone who doesn’t work every week of the year. The most common example of this is someone on a term-time-only contract, e.g. teachers, who typically work for 39 weeks per year.
A part-time worker is anyone who works every week of the year but on fewer days or hours than a full-time colleague. A part-time pattern might mean they work 3 days per week instead of 5 or 4 hours per day instead of 8, but they work 52 weeks per year.
It's important to understand the difference between a part-year worker and a part-time worker as the holiday calculation is different for each.
What did the UK supreme court decide?
The UK Supreme Court (UKSC) confirmed that the 12.07% Method should not be used for any holiday calculations.
Instead, all workers are entitled to receive 5.6 weeks of paid annual leave, regardless of how many weeks per year they work. This means term-time, zero-hours and casual staff should all get 5.6 weeks’ leave.
When calculating pay for this leave, employers should take an average of their weekly earnings over the previous 52 working weeks.
The UKSC summarised that the amount of leave a part-year worker under a permanent contract is entitled to must not be pro-rated to be proportional to that of a full-time worker.
What does this mean for me?
If your employees work every week of the year on a permanent basis (this will likely be most contracts), the judgment will have little impact, as there is already no need to pro-rate leave or entitlements.
However, if you utilise term-time, zero-hours or variable-hours contracts, where workers don’t work every week of the year, you might have to change the way you calculate their holiday entitlements.
You will no longer be able to pro-rate leave based on working hours or use the 12.07% Method to calculate leave and pay accrual.
Instead, you should make sure all staff get 5.6 weeks’ leave per year. This does, in practice, mean an employee who works for 30 weeks of the year gets the same annual leave entitlement as someone who works 52 weeks per year.
What might I have to think about changing?
First, assess who in your organisation it might impact. Remember, changes may be needed for anyone who works on a zero-hours, variable-hours or term-time contract. Staff who work full-year, part-time or fixed-term should not be impacted.
Contracts and annual leave policies for affected staff will need to be updated. This means removing any clauses which refer to the prorating of annual leave, or using the 12.07% Method.
You might want to consider providing an update to staff and looping in unions, so they know you are aware of the changes and are working through any necessary amendments.
How should I now calculate holiday leave entitlement?
All employees are entitled to 5.6 weeks of paid annual leave. As such, there should be no need to do any further calculations to work out accrual or entitlement (unless for part-time or fixed-term staff). The percentage method (12.07%) should not be used for any holiday calculations.
You should have measures in place to keep track of what entitlement has been used so far in the holiday year (in the same way you might do for full-time/full-year staff) and ensure everyone takes their full 5.6 weeks’ leave.
Do I have to increase leave entitlement?
Yes, if leave entitlement has previously been pro-rated, you must make sure this is increased so employees get 5.6 weeks of leave per year. Ideally, this should be done so employees can use the full 5.6 weeks within the current holiday year.
You can choose to enforce annual leave by giving employees double the amount of notice for how long you want them to take, e.g. to enforce 2 days’ annual leave, you would need to give 4 days’ advance warning. Or, you can choose to let employees book annual leave at a time that suits them.
For example, if you pro-rated leave for an employee who was on a term-time contract of 39 weeks, their entitlement might currently be to 4.7 weeks, rather than 5.6. This is worked out as 39/46.4 x 5.6.
As such, you should ensure employees are able to take the additional 0.9 weeks (5.6 – 4.7) before the end of their holiday year.
Can I Pay in lieu of the extra leave entitlement this year to cover any increases?
No, paying in lieu of statutory minimum entitlement (5.6 weeks) is not allowed unless the employment is terminated. You must let employees take the full 5.6 weeks' leave within the current holiday year and pay for leave at the time it is taken
How should I calculate holiday pay?
Holiday pay should be paid at the normal rate of pay. Where weekly pay varies (for example, for workers on a zero-hours contract), you should calculate holiday pay based on an employee’s average weekly earnings over the previous 52 paid weeks.
The reference period must only be weeks for which the worker was actually paid. It must not include weeks where they were not paid as they did not work. It should also not include any weeks where “normal” pay wasn’t given, for example, because they were on sick leave so given sick pay.
You can go back for a maximum of 2 years (104 weeks) to obtain the relevant 52 weeks’ pay data. In the event that the employer does not have 52 weeks of data from the previous 104 weeks, then the reference period becomes the number of weeks’ worth of data available. For example, if the employee has not been in employment long enough to attract 52 weeks’ pay then the reference period will be the corresponding number of weeks worked.
Where a worker is paid a regular weekly salary, with fixed hours and fixed pay, there is no need to make a separate holiday pay calculation. The worker will be paid their normal weekly amount for weeks when the holiday has been taken.
What might this calculation look like in practice?
Add earnings from the previous 52 working weeks / 52 = average weekly pay.
Pay for holiday period = average weekly pay x no. weeks’ holiday.
For example, if an employee’s average weekly pay is £100 and they want to take 2 weeks’ holiday:
£100 x 2 = £200 holiday pay.
This calculation should be redone at the beginning of every holiday period.
Do I have to backpay for previously underpaid holidays?
Maybe. If you have been calculating pay correctly (by taking a 52-week average of weekly earnings), but were pro-rating entitlement to working weeks, you should be able to rectify any mistakes by allowing staff to take the increased leave entitlement and paying them for it. This is outlined in the “Do I have to increase leave entitlement” section above.
But, if you have been calculating pay wrong (e.g. by using the 12.07% method rather than taking a 52-week average), it’s possible that you may owe employees compensation for underpayment of holiday pay.
You may wish to take a slightly riskier angle and see if anyone comes to ask about the underpayment and only pay if asked. Or, you can proactively take steps to provide the employee with back pay.
The wait-and-see approach might not be possible for unionised environments since the union will likely be in contact to campaign on behalf of the employees they represent to get backdated pay. It’s also important to remember that doing so could significantly increase the risk of unlawful deduction from wage claims being raised by employees.
When calculating what backpay is due, you will need to assess what was paid using the 12.07% method and what should have been paid by taking a 52-week average; the compensation for underpayment of holiday pay will be the difference between these two figures.
What are the risks if I don’t provide back pay?
Where an employee or union requests that backpay is given for a previously underpaid holiday, it’s likely you will have to do so, otherwise, you are at significant risk of receiving an unlawful deduction from the wages claim.
Usually, an unlawful deductions claim must be paid within 3 months of the last deduction, or in this case, within 3 months of the last holiday pay payment. But, given the scope of the situation, tribunals might allow employees to bring a claim within 3 months of the end of the holiday year in which holiday pay was calculated incorrectly.
Additionally, there are the risks of disrupting employee relations, thus reducing productivity, engagement and satisfaction, as well as action from trade unions.
Are there any situations where I can pro-rate?
Yes, annual leave can be pro-rated for a part-time worker. This is anyone who works 52 weeks per year but on fewer days/hours than a full-time colleague. For example, someone who works 3 days per week instead of 5. This person would be entitled to 16.8 days’ annual leave instead of 28 days (5.6 x 3 = 16.8 days).
Annual leave can also be pro-rated for fixed-term contracts, where there is a clearly agreed date for when the employment will end. For example, if an employee is contracted to work for 3 months only to cover a busy period (e.g. summer holidays), their holiday entitlement will be 1.4 weeks. This is worked out by dividing 5.6 by 12 months and then multiplying by 3 months (5.6/12 x 3 = 1.4 weeks).
Finally, annual leave can be pro-rated for new starters and for leavers (e.g. someone who starts and/or leaves during an annual leave year), so that the entitlement is only based on full months worked under the contract.
Can I Pro-rate for zero-hours, variable hours, casual or agency staff?
No, all staff are entitled to 5.6 weeks of annual leave.
The UK Supreme court was clear that the amount of leave for part-year workers under a permanent contract must not be pro-rated to be proportional to that of a full-time worker.
I don’t want to give part-year staff 5.6 weeks annual leave - what are the risks?
Not providing the full 5.6 weeks entitlement will be in breach of the law and is not recommended. In this situation, there is a significant risk of tribunal claims, industrial action, employee grievances and resignations.
There could also be wider implications on your insurance protection, where we have taken out on a policy on your behalf as part of your contract with us.
For further information on the risks associated with not providing 5.6 weeks’ annual leave to part-year staff, please contact the Advice Service.
Does this mean I should stop using part-year contracts?
Term-time, variable-hours and zero-hours contracts, like any other type of contract, have their pros and cons. You may want to stop using such contracts, to avoid paying 5.6 weeks’ annual leave for staff who don’t work every week of the year.
As an alternative, you can consider using fixed-term contracts. Those on a fixed-term contract may have their annual leave entitlement prorated to the length of the contract. It's useful to consider why you are introducing a part-year contract in the first place – is it because you want to offer a few hours per week? Is it because you only need someone to cover busy periods, like summer or Christmas? If so, a fixed-term contract may be a more effective alternative.
If you want to continue having staff available year-round, and only call on them as and when needed, zero-hours and variable-hours contracts can continue to provide great flexibility. As such, it is worth weighing up the benefits of having such contracts against the cost of paying higher amounts of annual leave for them, before coming to a decision.
Can I continue to use rolled up holiday pay?
Government guidance says that holiday pay should be given at the time when annual leave is taken and that an employer can't include an amount for holiday pay in the hourly rate. It also says that if a current contract still includes rolled-up pay, it has to be renegotiated.
In the past, employers could try to use rolled up holiday pay by being transparent with employees and ensuring they are given time off. But, employers could still raise a claim if they thought they had been stopped from taking their annual leave.
However, since rolled-up holiday pay typically uses the 12.07% method to calculate accrual, the Supreme Court’s judgment that this should not be used adds extra risk. As such, it’s best to agree to alternative agreements with affected staff and ensure they are given 5.6 weeks’ annual leave, with pay for this leave given at the time the holiday is taken.
Can the supreme court’s judgement be overturned?
No, the UK Supreme Court is the highest a case can go. Their decision is final and cannot be appealed or changed.
The only way there may be changes to their ruling is if the government intervened and changed the wording of the law to allow part-year workers’ leave entitlement to be pro-rated. Similarly, only by changing legislation could the 12.07% method be lawful.
Will Legislation be changed to allow part-year workers' entitlement to be pro-rated?
The government has recognised the unintended anomalies created by the current wording of the Working Time Regulations 1998 (e.g. that part-year workers can get more annual leave than part-time workers, despite working the same total number of hours across a year) so is taking steps to address the issue and provide clarity.
It hopes to amend legislation to allow holiday entitlement to be pro-rated for part-year and irregular hours workers, so that annual leave is directly proportionate to the time they spend working.
As such the government launched a consultation on 12 January 2023, which will remain open for 8 weeks until 9 March 2023.
The consultation specifically seeks responses to proposals to legalise the 12.07% Method, which will calculate leave entitlement based on hours worked. It also proposed to implement a 52-week reference period, including nonworking weeks, to calculate leave entitlement.
If passed, this would mean employers calculate 12.07% of total hours worked over the previous 52 weeks to determine an employee’s annual holiday entitlement.
A similar calculation has been suggested for those in their first year of employment, to calculate monthly entitlement, and for agency workers, whose arrangements and entitlements can be complex.
The process for calculating holiday pay, i.e. calculating average earnings over the previous 52 weeks, discounting any weeks in which no work was done, to a maximum of 104 weeks, will remain unchanged
When will the law be changed?
The consultation will close on 9 March 2023, after which the government will need some time to review responses and put together an outcome. From there, any changes must be discussed and approved in parliament before they can come into effect. As such, it can be months, or in some cases even years, before any changes are confirmed.
However, it is worth noting that the Retained EU Law (Revocation and Reform) Bill is also making its way through parliament at the moment, which aims to review and either repeal or retain all EU-derived laws by 31 December 2023.
The Working Time Regulations 1998 is one of the pieces of legislation that is derived from EU law so is subject to review anyway. As a result, it could be that changes are made in line with the 31 December deadline, meaning there could be changes before the end of the year BUT this is not guaranteed.
What should I do in the meantime?
It’s important to remember that no changes have been confirmed, so it’s best to follow the rules set out in the Harpur Trust judgment and not pro-rata entitlement.
Employers who have pro-rata entitlement based on the government’s proposals will be in breach of current laws, so open themselves up to the risk of claims being raised and likely being successful
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