A landmark judgment on the calculation of holiday pay

Legal background

The Working Time Regulations 1998 (WTR) grants all workers the right to paid annual leave. This right extends beyond employees with a fixed working pattern, and includes atypical workers such as casual staff or zero-hours workers who work ‘as and when required’ – often infrequently.

The WTR provide that each worker is entitled to 5.6 weeks’ annual leave, and that when taking this holiday a worker is entitled to a week’s pay for each week’s leave. For employees with normal working hours this means that they should receive their contractual weekly pay (although an average of additional earnings such as regular paid overtime and commission may be required). For employees with fluctuating working hours this means an average of their earnings over the last 52 weeks in which they have received remuneration.

This is a simple concept for full-time employees who are entitled to 28 days’ leave (including any bank holidays). It is also generally straightforward to apply a pro-rata calculation for part-time staff who work fixed hours (whether they worked shorter hours and/or fewer days). However, it has long been known that the WTR offer little clarity on the approach which employers should take in calculating holiday entitlement and pay for casual workers who have little or no discernible working pattern.

A common approach taken by employers has been to calculate holiday entitlement for these workers as 12.07% of hours actually worked, on the basis that this is the equivalent of statutory holiday for full time workers (who received 5.6 weeks’ leave for working the remaining 46.4 weeks of the year). Workers are then paid at their normal or average hourly rate when taking this leave. This approach was encouraged by ACAS in guidance which has since been removed. Other employers have opted for a more direct approach by simply paying a 12.07% supplement on top of basic pay earned to account for holiday pay rather than calculating any holiday entitlement – although this falls foul of the prohibition on paying ‘rolled-up holiday pay’, employers took a commercial view that it would result in the worker being paid roughly the correct amount of holiday pay in any case.

Background

Ms Brazel was a music tutor who provided lessons for pupils at the school operated by Harpur Trust. She only worked during term-time, and did not have a fixed or guaranteed number of hours under her contract of employment – she would typically work between 10 and 15 hours each week. She was paid holiday pay at the end of each of the three school terms each year, which the Supreme Court interpreted as her taking 1.87 weeks’ leave in the subsequent school holiday periods (i.e. one third of her 5.6-week annual entitlement)..

The school calculated Ms Brazel’s holiday pay entitlement at the end of each term as being 12.07% of the hours which she had worked during that term, multiplied by her hourly rate of pay. The school’s argument was that this placed her in the equivalent position to a full-time employee, as recognised in the ACAS guidance in place at the time.

Ms Brazel’s argument was that this method does not follow the strict approach envisaged by the WTR. She submitted that when she took holiday at the end of each term, she should be paid holiday pay of 1.87 weeks multiplied by her average weekly earnings over the last 52 weeks. The crucial point is that this 52-week average calculation requires employers to ignore any weeks in which the worker receives no pay, which would essentially result in Ms Brazel’s holiday pay being calculated as though she worked every week of the year. In the example considered by the court, Ms Brazel’s calculations claimed that she should have received £687.26 in holiday pay at the end of one term rather than £452.20 (a difference of over 50%).

What did the Supreme Court decide?

The Supreme Court decided in Ms Brazel’s favour. They found that whilst the 12.07% may have been a convenient method to calculate holiday for a casual worker and was encouraged by ACAS, it was not permitted by the WTR. The Supreme Court emphasised that:

1. Casual workers are entitled to 5.6 weeks’ holiday each year. The concept of 5.6 weeks cannot be converted into a fixed number of hours’ leave, for example based on 12.07% of the hours actually worked in any year.
2. When a casual worker takes leave, they are entitled to be paid the average weekly earnings during the last 52 weeks in which they have received remuneration.

In reaching this conclusion, the Supreme Court readily acknowledged that this would result in this category of part-time staff receiving more generous treatment than full-time employees. The Court noted that this was not prohibited by law, even though part-time workers enjoy the equivalent legal protection in comparison to full-time comparators.

The Supreme Court also acknowledged that this judgment could produce some extreme results. One example put forward in the employer’s case was a school invigilator who may only work a few weeks a year, but would be entitled to a disproportionate holiday pay windfall as they would receive 5.6 weeks’ paid leave calculated based only on the weeks in which they actually work. With invigilators’ working patterns typically being condensed around exam periods, this could result in them receiving a holiday pay entitlement approaching that of a full-time employee despite only working a fraction of the year.

Who could this impact?

Whilst the case in question concerned a casual term-time only employee in a school, this judgment will have a significantly wider impact across other sectors.

Any employers who engage staff on a ‘casual’ or other form of atypical basis should review their current approach towards annual leave and holiday pay arrangements for these workers, to consider whether they are compliant with the approach which is now required in light of the Supreme Court judgment.

Employers should also review the scope of their potential financial liability if casual workers (or ex-workers) look to bring Employment Tribunal claims for (additional) holiday pay in light of this ruling. Whilst many potential claims would be limited to the two-year period immediately preceding the date on which the claim is issued, the applicable time limit and any limitation period would depend on the exact nature of the specific holiday pay arrangements which were applied by the employer.

Any employers who need advice relating to casual workers or holiday pay should get in touch with one of our specialist employment lawyers.