31 Oct 2022
The ACAS Guidance used to suggest that holiday pay for such workers should be paid at 12.07% of earnings. A recent case has however clarified that this approach is incorrect and that the correct way to calculate holiday pay is to base it on the average pay that the employee received over the 12 weeks prior to taking the period of holiday. These should be weeks in which the employee was paid. If they were not paid in one of those 12 weeks (e.g., because they were sick or did not work), the last paid week before that should be used to calculate holiday pay.
What’s the case?
The Harpur Trust v Brazel [2022] UKSC 21
In this case, the Claimant was a music teacher at a school and received 5.6 weeks’ holiday entitlement per year according to the contract. Holiday pay was paid on the basis of 12.07% of each term’s accrued hours/earnings, at the end of each term. She therefore received her holiday pay in March, August and December.
The Supreme Court has now held that holiday pay for term-time workers should not be capped at 12.07% and instead, should be based upon the “52-week average” of income received prior to the taking of holiday. For each day or week of holiday taken, the amount payable should be equivalent to earnings received in an average working day or week.
The result is that this can give part-time workers proportionately more holiday pay than a full- time worker - since there is no prohibition on treating part-time workers more favourably than full-time workers (the law is to prevent them being treated less favourably).
The Court said it was a straightforward calculation, essentially: a simple application of the formula in the Working Time Regulations 1998 (WTR).
However, things are rarely simple in employment law!
So, what does the law say?
Holiday Pay - Regulation 16(1) WTR provides that a worker is entitled to be paid in respect of any period of annual leave to which he is entitled under regulation 13, at the rate of a week’s pay in respect of each week of leave.
Holiday Entitlement - Under regulation 13 and 13A, workers are entitled to 5.6 weeks annual leave. For a full-time worker, the value of that will be greater than for a part-time worker.
Note that the Harpur Trust v Brazel case concerned only holiday pay. It does not apply (at present) to calculating holiday entitlement.
So how do we work out what one week’s pay is for the worker who earns a different amount every week, and/or in some weeks, earns nothing at all?
A Week’s Pay
Section 224 Employment Rights Act 1996 applies where there are no normal working hours and provides that a week’s pay should be based on the average over a 52-week reference period, and any weeks in which no pay was received should not be taken into account.
[NB - In other cases where there are normal working hours each week, a worker will have their week’s pay calculated with reference to those hours.]
Under Section 228 Employment Rights Act 1996, where the employee has been employed for less than 52 weeks, the amount of a week’s pay is the amount which “fairly represents” a week’s pay.
So, in summary:
- Workers get a week’s pay for a week’s leave;
- Calculate the average weekly pay using the last 52 weeks in which pay was received;
- If no pay is received in a week, that week doesn’t count, keep going back (up to a maximum of 104 weeks);
- If the worker has been employed for less than 52 weeks, a week’s pay is based on the weeks employed, or the amount which “fairly represents” a week’s pay.
- If the employee is always paid the same hourly rate and works the same number of hours each week, there is no need to carry out this calculation as the result would always be the employee’s standard hourly rate. In these circumstances, holiday pay can be calculated by applying the usual hourly rate to the number of hours’ holiday taken.
Zero Hours Workers
Holiday Entitlement
Holiday entitlement for a zero hours worker is the same as for a normal, full-time worker. The holiday entitlement is still 5.6 weeks or 28 days each year. However, as it is very difficult to determine what a week’s holiday actually equates to, holiday entitlement needs to be expressed in hours in order to work out what an employee should be paid.
As mentioned above, the Brazel case did not provide clarity as to how holiday entitlement should be calculated.
Although it does not say that it is unlawful, the Brazel case shows that using the 12.07% approach for term-time workers may produce unreliable results.
The 12.07% method becomes problematic 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.
Therefore, if the 12.07% approach is used, the employer should ensure that they carry out a reconciliation at the end of each holiday year (and at the end of a contract) to ensure, in retrospect, that no workers have been underpaid their holiday pay.
Conclusions
- We suggest that it would be helpful if employers clearly define the accrual of holiday and when it is deemed to or should be taken.
- As the Supreme Court have now held that holiday pay should not be based on 12.07% of income received, we suggest that collective agreements and contracts that refer to this and support the application of it, should be re-negotiated and revised. Holiday pay should be based on average earnings.
- Be aware that the recent Supreme Court judgment only related to holiday pay - it did not decide that using the 12.07% formula for calculating holiday entitlement (as in the amount of time on holiday) was unlawful. It did however highlight that this approach may produce inaccurate results. If the 12.07% approach is used, we recommend that a reconciliation is carried out at the end of the holiday year (or on termination of employment) to ensure that no worker has been underpaid.
- Always undertake calculations of holiday pay with reference to average earnings over a 52-week period, for workers with no normal hours of work.
- Bear in mind that holiday pay cases are fact specific and there is no “one size fits all approach”. With inadequate guidance available, the suggestions in this factsheet are not definitive, but we hope the information contributes to a better understanding of how the system works.
Claims and Time Limits
A claim for breach of regulation 16 WTR must be presented within 3 months (less one day) of the date that payment of holiday pay should have been made.
A claim for unlawful deduction from wages must be presented within 3 months (less one day) of the date of the deduction (or last in a series of deductions). If there is a gap of 3 months or more between underpayments then this may be held to “break” a series; however, this is currently subject to legal challenge. All historical claims are limited to 2 years.
In circumstances where the contract specifies the member’s holiday entitlement and, in breach of contract, less is paid, a claim for breach of contract should also be considered but of course that can only be pursued in an Employment Tribunal where employment has ended. Otherwise, such a claim must be pursued in a County Court, with a time limit of 6 years from the date of each underpayment. Breach of contract claims can only be pursued where there is a clear contractual right to a certain amount of holiday pay.
This article has been prepared by Morrish Solicitors LLP. It is for general guidance only and is not a substitute for specific advice in any particular case. It is current as at 25.10.22.