The key points from the case:
- Holiday calculation using the 12.07% method ruled unlawful by Supreme Court
- Holiday pay for part-year workers should be calculated using the averaging method ever 52 weeks
- This also affects zero-hours employees who do not work a full year.
- Historic liability of unlawful deduction from wages claims
Who is Mrs Brazel?
Mrs Brazel was and remains a visiting music teacher who is engaged on a zero-hours contract to work during term times. She works a variable number of hours during weeks in term time and does not work full-time or for the whole year. As a worker under the Working Time Regulations (WTR), she is entitled to 5.6 weeks paid annual leave each year, which she takes during the school holidays.
Before September 2011, Mrs Brazel’s holiday pay was determined by calculating her average week’s pay over a 12 week period and multiplying that by 5.6 weeks. In 2011, Harpur Trust altered how it calculated the amount of holiday pay, instead calculating holiday pay on the basis of 12.07% of hours worked, which was less favourable to her. Mrs Brazel brought a claim for unauthorised deductions from pay in the Employment Tribunal, which decided against her, but on appeal both the EAT and Court of Appeal decided in her favour. The Supreme Court decision was that the appeal was dismissed (unanimously).
How did the Supreme Court make their decision on Holiday Pay Calculations for Part-Year Workers?
The Supreme Court held that holiday pay for part-year workers should be calculated using the averaging method (over a period of 12 weeks at the time of the claim, now 52 weeks), ignoring any weeks that have not been worked. The pro-rata approach taken by the employer was wrong. Even though this is likely to result in higher rates of holiday pay for atypical workers, the Supreme Court was satisfied that this is the correct method of calculation under the WTR.
The school argued that a part-year worker’s leave must be pro-rated to account for weeks not worked. As the WTR were enacted in part to implement the Working Time Directive (which remains ‘retained EU law’ following Brexit), the school argued that it had to apply what it referred to as the ‘conformity principle’ arising from EU case law on the directive – and this requires that the amount of annual leave (and therefore holiday pay) should reflect the amount of work actually carried out by Ms Brazel.
The Supreme Court however held that EU law does not prevent a state from making a more generous provision than the ‘conformity principle’ would produce. The amount of leave to which a part-year worker under a permanent contract is entitled is therefore not required to be, and under domestic law must not be, pro-rated to be proportionate to that of a full-time worker.
The alternative calculation methods suggested by Harpur Trust were directly contrary to the statutory calculation method set out in the WTR. The Supreme Court did not accept that the fact that a worker in Mrs Brazel’s position receives holiday pay representing a higher proportion of her annual pay than full time workers or part time workers working regular hours was so absurd as to justify wholesale revision of the WTR.
Who does this affect Holiday Pay Calculations for Part-Year Workers?
At first glance, the ruling seems illogical and inequitable, and it is difficult to explain to full-year workers why a colleague who works only part of the year is entitled to the same holiday entitlement as a full time employee as until now, holiday entitlement has been pro-rated to reflect the number of weeks employees worked each year.
It could be argued that this is an area that requires consideration of legislative reform but in the meantime, employers may wish to reconsider the circumstances in which they make use of permanent contracts for certain types of workers.
It is not just teachers who are affected; all zero-hours employees who do not work a full year must have their holiday calculated in this way and not by the application of the 12.07% formula.
Many employers have adopted a ‘wait and see’ approach to this case but we now have a decision. Organisations have been caught out by previous holiday pay rulings and this one could place a significant financial burden on employers. For workers on zero hours contracts, agency payroll, or via umbrella companies, it begs the question of how this can be afforded.
There is also the question of historic liability and employers will need to decide if they will make a back payment in respect of any holiday pay underpayments. Generally, where a worker brings an unlawful deduction from wages claim based on a series of deductions from an ongoing pattern of incorrect holiday payments, an employment tribunal can only look back at the two years preceding the unlawful deduction from wages claim being brought.
What happens next?
Alcumus advises all employers to ensure they are using the 52-week reference period method to calculate holiday pay, as this is the method specified by legislation.
Gov.uk states that there are no regulations on how to convert the entitlement into days or hours for workers with irregular hours.
12.07% cannot be used to calculate holiday for part year workers. If your zero hours staff work every week, then 12.07% will remain a viable calculation but for most this is unlikely. The 12.07% method becomes most problematical where there are weeks during which the worker remains under contract but does no work. The longer the period without work, the more inaccurate it becomes. This is because, for every week the worker remains under contract, they accrue 5.6/52 or 0.11 of a week's leave under the WTR, even if no work is done. However, according to the 12.07% rule they would accrue no leave if no work had been done.
Employees will be entitled to 5.6 weeks of the average number of hours they have worked over the last 52 worked weeks (or total worked weeks if not worked 52 yet) (you will need to exclude any weeks where hours were not worked). From this you will be able to calculate what an average day and hour is too.
It would also be a good time to consider if offering guaranteed hours contracts or even short term temporary contracts will remove confusion in this regard as hours will be set each week and therefore much easier to calculate 5.6 weeks.
If you have term time only or zero hours contracts it is especially important that we review your holiday calculation methods.