Landmark decision on holiday pay for part-year workers

Last month, the Supreme Court handed down a landmark decision which is significant for any employer that engages individuals on a so called ‘part-year workers’ basis.

In summary, the Supreme Court has confirmed that the 12.07% method to calculate the holiday pay of part-year workers is not the correct method to use and their holiday entitlement should not be pro-rated to reflect the fact they do not work for the whole year.

Stacey Cox, director and head of employment law and HR services at Wake Smith Solicitors looks at the case and its findings and its implications for employers.

This article covers:

• What are the rules on holiday and holiday pay?
• The facts of the latest case
• The impact of this decision and what it means for employers
• Your next move

What are the rules on holiday and holiday pay?

Under the Working Time Regulations 1998 (“WTR”) all workers have a right to 5.6 weeks’ paid holiday each year. For full-time workers, this is relatively straight forward to calculate. However, for part-year workers who have no normal working hours, this isn’t so easy.

The WTR amend the Employment Rights Act 1996 with regard to calculating a week’s pay for holiday pay purposes for workers that has no normal working hours. These rules state that holiday pay (i.e. a part-year worker) is calculated based on their average pay over a 52-week reference period immediately before holiday. Any weeks when the individual received no pay must be ignored and so earlier weeks need to be considered in the reference period where the individual did receive pay. This is to ensure that 52-weeks’ worth of pay data is collected in order to accurately work out their average pay.

To simplify, many employers used the 12.07% method to calculate holiday entitlement for part-year workers.

12.07% is used because a standard working year is 46.4 weeks (52 weeks less statutory holiday of 5.6 weeks). 5.6 weeks is then 12.07% of 46.4 weeks.

The 12.07% approach was recommended by Acas in guidance on calculating holiday pay for casual workers, however this has since been withdrawn and no reference is made to this in the WTR.

The facts of this case

Mrs Brazel was a visiting school teacher at a school run by the Harpur Trust (“the Trust”). She was engaged on a zero-hour contract basis and worked a variable number of hours during term time. She didn’t work full-time or for the whole year and there were no guaranteed or minimum working hours. Mrs Brazel was paid an agreed hourly rate of pay each month for the hours she worked in the previous month.

As a worker, under the WTR she was entitled to 5.6 weeks’ paid annual leave each year and was required to take this during school holidays when she was not teaching. No particular weeks were designated as statutory holiday but the Trust made three equal payments in respect of holiday at the end of each term ie: 1.87 weeks each time.

The Trust used to work our Mrs Brazel’s holiday pay using the averaging method. They would look at what Mrs Brazel had been paid in the 12 weeks immediately before the school holidays, divide that by 12 to get her weekly average and then paid her 1.87 times that weekly average. In this instance 12 weeks was used as the reference period rather than 52 this was the statutory reference period for calculating a week’s pay at the time. 

In September 2011, the Trust changed how they were going to work out holiday pay for part-year workers. Instead of using the averaging method, the Trust calculated Mrs Brazel’s earnings at the end of each term, worked out what 12.07% of that figure was, and then paid her 1/3 of that. This resulted in Mrs Brazel being paid less holiday pay.

She brought a claim for unauthorised deductions from wages. Originally, the Employment Tribunal decided in favour of the Trust. However, the Employment Appeal Tribunal and the Court of Appeal decided in favour of Mrs Brazel. The Trust then appealed to the Supreme Court.

The Supreme Court’s decision

The Supreme Court decided in favour of Mrs Brazel. They said that a part-year worker should receive the normal 5.6 weeks’ holiday per year which should not be pro-rated because they are under a contract for the whole year, but work part of that year. Mrs Brazel was therefore entitled to receive 5.6 weeks’ holiday per year and the Trust were calculating it wrong because she was not receiving this.

The Supreme Court then held the correct method of calculating holiday pay is using the averaging method. As a reminder this is where the employer takes the worker’s average pay over the 52-week period immediately before the holiday, making sure to ignore any weeks where the worker didn’t earn.

The 12.07% method was outright rejected by the Supreme Court for being contrary to the statutory calculation method set out in the Employment Rights Act 1996.

Interestingly, the Supreme Court did recognise their decision would lead to a slight favouring of casual workers, but they justified this by saying it was not so absurd as to justify revising the legal provisions for holiday pay.

The impact of this decision and what it means for employers

This decision affects workers without normal working hours so casual workers, term time workers or zero hours workers. It shouldn’t affect those working part-time with set hours throughout the year because their holiday can still be calculated as a reduced number of days compared to a full-time worker.

It also affects employers who use the 12.07% method to calculate holiday pay. Any employers using this method should re-visit that approach and consider using the averaging method.

Employers need to be aware of potential claims for unlawful deductions from wages from workers who have previously had their holiday pay calculated using the now discredited 12.07% method. Employers could be liable for up to two years’ underpayments.

Your next move

If you do need assistance with the method for calculating holiday pay, and/or would like to know how to limit the possibility of claims in this respect please contact Stacey Cox at Wake Smith Solicitors on 0114 224 2087.

Find out more about our employment services.

Published 11/08/22